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Fundamentals of Tax Accruals |
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Example 3 – Computing and Classifying Deferred Assets
Bizzer Corporation has pretax accounting income of $10,000, including $2,500 of tax-exempt interest, warranty expenses of $750 and depreciation expense in excess of books that is outlined below for each of the years. Tax rates for the first two years are 40%. In year 3 they reduce to 30%. Computing the tax provision and classifying the deferred taxes would look something like this:
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Recall, there is a requirement that current deferred assets must be segregated from noncurrent deferred assets according to the underlying classification of the asset. Thus, all temporary differences from warranty expenses (classified as a current asset) must be separated from the depreciation expense (normally classified as a noncurrent asset). |
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19X2
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19X3 |
19X4 |
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Deferred taxes–current (warranty) |
<$300> |
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= |
<$300> |
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Deferred taxes–noncurrent (depreciation) |
<$147> |
$104 |
$157 |
= |
$114 |
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Note that each of the temporary differences is multiplied by the enacted tax rate. |
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Even though deferred taxes are segregated between current and noncurrent, within each of these classifications the balances are netted for positive and negative adjustments, e.g., depreciation. |
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Because the current deferred taxes have a negative balance they will be shown as a deferred tax asset. The noncurrent deferred taxes will be shown as a deferred tax liability due to their positive balance. Thus, the tax provision is the sum of all of the following:
$3,100 + 114 – 300 = $2,914
The journal entry looks like this:
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Copyright © 1998 Bizzer Professional Training |
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