Okay, I know how they got the answers, but isn’t this a deferred tax asset instead of a deferred tax liability? Taxes Payable are greater than Tax Expense so is it not a deferred tax asset? A company purchased a new pizza oven directly from Italy for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41 percent, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35 percent in years 1 and 2, and 30.00 percent in year 3. For purposes of this exercise ignore all expenses other than depreciation. What is the tax payable for year one? A) $1,909. B) $1,130. C) $779. D) $1,626. The correct answer was B) $1,130. Tax payable for year 1 will be $1,130 = [{$7,192 - ($12,676 x 0.35)} x 0.41] What is the deferred tax liability as of the end of year one? A) $780. B) $1,909 C) $1,129. D) $320. The correct answer was A) $780. The deferred tax liability for year 1 will be $780. Pretax Income = $4,657 = ( $7,192 - $2,535) Taxable Income = $2,755 = ($7,192 - $4,437) Deferred Tax liability = $780 = [($4,657 - $2,755)(0.41)] Alternative solution: The difference in depreciation at the end of year one is $12,676 × (0.35 - 0.20) = $1901. Deferred tax liability = difference in depreciation × tax rate = $1901 × 0.41 = $780.
you are depreciating more for tax purposes (4436 vs 2535). Therefore, you income for tax purposes will be lower by 4436-2535 =1,901. That means you paid less taxes by 1901*0.41 = $780 (which will reverse in future) ==> a DTL
What will be the DTL at the end of year 2 ? DTL @ end of year 2 = (780+780)*0.31/0.41 = $1180 Can someone validate my calculations please !! I remember couple months back there was a discussion on when the tax change will apply on DTL. e.g. - since we already know that there will change of taxes in year 3. So why is DTL in year 1 not equal to 1901*0.31 = $589 ??
No change in taxes.