Question

Question 4 .

1.     The balance sheet for Colt Corp. provided the following summarized pretax data:

Year 2015            Year 2016

            Deferred tax liability                $376,000            $248,000

Tax expense as reported on the 2016 Income Statement was $493,000.

Calculate the amount of income taxes payable for 2016?

Answer 1

Deferred Tax Assets/Liabilities are created because of the different rules and treatments of transactions in accounting and taxation. These are created when there are timing differences between tax payable and tax expense of an year.

If the tax paid is less than tax expense in accounts, then a deferred tax liabliity is created and if tax paid is more than the tax expense in accounts, then a deferred tax asset is created.

Example: DTL = Excess depreciation allowed in taxation rules and hence tax paid is less than tax expense in accounts, DTL is created and when tax expense rises again in future years, such difference is debited to the DTL account. DTL appears on the liabilities side on the balance sheet.

Deferred tax liability is reversed when such tax is paid in the future, but it should be reversed to that extent to which it reduces the timing difference, not just any reason. For instance, in 2014 DTL is created because of Additional depreciation, and in 2015, tax paid is more than tax expense in accounts because of unrecognised yet received revenue, now you cannot reverse the DTL created in 2014 but create a new DTA in 2015.

So, the reason for creating and maintaining DTL/DTA is important although they are presented net of each other.

In the current scenario, though reasons are not given, using the basic priniciples of accounting,

Current Year DTL = Income tax expense - Tax Paid + Previous Year DTL

==>Tax Paid = Income Tax Expense + Previous Year DTL - Current Year DTL

= 493,000 + 376,000 -243,000 = $626,000

Good luck