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 Topic: income tax ( Topic Closed)
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aimtobeacpa
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Joined: 10 Dec 2009
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Posts: 657
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| Posted: 06 Jul 2010 at 01:48 | IP Logged
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| Long-term loss accrual in excess of deductible
amount |
10,000 |
| Depreciation in excess of financial statement amount |
(25,000) |
The $10,000 difference (loss
accrual) is a deductible amount, because more loss is recognized in the
current year for accounting purposes than for tax purposes. Therefore,
in the future, a greater amount of loss will be deductible for tax
purposes, when the difference reverses. This amount gives rise to a
long-term deferred tax asset of $4,000 ($10,000 x .4).
The $25,000 difference (depreciation) is a taxable
amount because less depreciation will be recognized for tax purposes
than for accounting purposes in the future. This amount gives rise to a
long-term deferred tax liability of $10,000 ($25,000 x .4).
i am not able to understand the explanations give...can someone explain in simple language...
__________________
BEC-74,82(lost credit),78
FAR-67,80
AUD-75
REG-68,72,79
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nipson
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| Posted: 06 Jul 2010 at 04:42 | IP Logged
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Acme has the following on year-end financial statements:
Revenue 1500
Expenses 1000 (includes depreciation expense of 100)
Income 500
Acme uses straight line method of depreciation. Types of measurement methods required by the IRS are often different from the measurement method used by firms. According to the IRS, Acme depreciation should be accelerated for tax reporting purposes. Accelerated method and straight line method both result in the total amounts over the total life of the asset, but the accelerated method will recognize a greater amount of depreciation in early years. Acme is in the early years of recording depreciation; so according to the IRS, its depreciation expense should be reported at 125 for their tax return.
Acme Tax return will show:
Revenue 1500
Expenses 1025 (including dep. expense of 125, an increase of 25)
Income 475 this amount is less than the 500 we originally reported in our financial statement, so our TAX RETURN income is less than our FINANCIAL statement amount because our tax depreciation was in excess of our financial statement amount.
Lower income means lowers taxes, right? Paying less taxes is considered a benefit by us for the current period.
Now lets look at the depreciation amounts.
Current year our book dep is 100 and accel method tax amount is 125. Lets say our asset is depreciated for only 2 years and we just accounted for the first year. Along comes year 2 and we continue our straight line dep... so we have 100 dep exp on our books.
Obviously our total dep is 200. Therefore, we will eventually recognize 200 for the IRS too. Cuz we dont want the Man seizing our bank accounts for cheating on taxes. Anyways, here we are in year 2 and we have 100 dep exp on our books. So thats 200 dep exp we have reported on our books over 2 years and 125 reported to the IRS... so how much are we gonna report to the IRS in year 2? The remaining 75 of course. Back to the books...
Acme happens to make the same income in year 2:
Financial statements show:
Revenue 1500
Expenses 1000 (includes depreciation expense of 100)
Income 500
Our IRS tax return for year two shows:
Revenue 1500
Expenses 975 (includes depreciation expense of 75)
Income 525
Our TAX Income is now GREATER than our financial statement income!! So we are paying MORE taxes in Year 2, even though our financial revenue and expenses did not change!
Lets jump back to Year 1...
Given: Depreciation in excess of financial statement amount (25)
We now see that this excess of 25 is going to COST us MORE taxes in the FUTURE. If it takes money out of our pockets in the future, it must be a FUTURE LIABILITY.
How much is the future liability?
In Year 2 our books show 500 and Tax return shows 525. At a 10% tax, taxes are 50 and 52.5 respectively. Our Tax amount on our IRS Return is $2.5 more than our book amount. Hmmm. If we multiply our excess depreciation by our tax rate, we get 2.5! (25 * 10%)
So in Year 1, when we see the "Depreciation in excess of financial statement amount", we now know to record a deferred tax liability of 2.5 This is to recognized that we are going to pay more taxes in the future because of the current $25 difference. Im tired!
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aimtobeacpa
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| Posted: 06 Jul 2010 at 11:17 | IP Logged
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thanks for the explanation:)
__________________
BEC-74,82(lost credit),78
FAR-67,80
AUD-75
REG-68,72,79
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CeeJay
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Joined: 17 Jun 2010
Location: Jamaica
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Posts: 3
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| Posted: 18 Jul 2010 at 23:17 | IP Logged
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Thanks Nipson, you really cleared up this one for me....
__________________
BEC 83
AUD 85
FAR (Aug 2010)
REG (Nov 2010)
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