Efficient Tests of Balances Series—No. 30: Deferred Tax Calculations—A Case Study

The Measurement Process

 

Three steps are necessary:

 

  1. Compute the deferred tax liability and/or the deferred tax asset at the end of each period.
  2. The end of year deferred tax balances are compared to the beginning of the year and adjusted with the net debit or credit record deferred tax expense or deferred tax benefit, respectively.
  3. The current income tax expense or benefit for the year will be equal to current income taxes payable or refundable.

 

An adjustment would be prepared like this:

 

            Deferred tax asset—non-current (calculated)                                         $3,000

            Deferred tax liability—current (calculated)                                 $  200

            Deferred tax expense (MICOR method)                                      2,000

            Deferred tax asset—current (calculated)                                    1,100

            Deferred tax liability—non-current (calculated)                                           300

 

The current tax provision and the current liability would be the amount due on the current year tax return.

 

Note: MICOR means make it come out right! Plug!

 

A BASIC ILLUSTRATIVE EXAMPLE OF SFAS NO. 109 APPLICATIONS

 

ABC Company Facts

 

  • Deferred tax account balances at their 2009 yearend:
    • Deferred tax asset—current                  $      75
    • Deferred tax asset—non-current                  300
    • Deferred tax liability—current                      200
    • Deferred tax liability—non-current             1,200

 

  • Temporary differences:                                                               2010    2011 
    • Installment sale receivable—tax balance greater;

no allowance; future taxable amount (DTL)                 $1,000 $        0

 

  • Inventory—tax balance less due to IRC 263(a) adjustments;

      future deductible amount (DTA)                                 (1,000)      (500)

 

  • Depreciable assets—tax balance less due to impairment

      losses, exit and disposal activities; future deductible amount

      (DTA)                                                                     (1,500) (1,500)

 

  • Accumulated depreciation—tax balance greater due to

accelerated depreciation methods; future taxable amount

(DTL)                                                                           6,000    7,500

 

  • The enacted tax rate for federal and state taxes for all years is 20%.

 

  • At the end of 2010, a $5,000 tax credit carryforward was available which was earned in 2010.  It is expected to be used in 2011.

 

  • No valuation allowances are necessary for deferred tax assets since all are expected to be realized because of sufficient future income.

 

Calculations for 2010

 

          Current         

      Non-Current      

 

 Taxable

 Deductible

 Taxable

 Deductible

Temporary Differences

 DTL

 DTA

 DTL

 DTA

 

 

 

 

 

Installment sale receivable

$1,000

 

 

 

Inventory

 

$1,000

 

 

Depreciable assets

 

 

 

$1,500

Accumulated depreciation

 

 

$6,000

 

Tax rate

20%

20%

20%

20%

 

 

 

 

 

Deferred tax liability

            200

 

      1,200

 

Deferred tax asset

 

            200

 

           300

Deferred tax asset from tax credit carryforward

 

         5,000

 

 

 

 

 

 

 

Totals

           200

         5,200

      1,200

           300

Less beginning balances from 2009

          (200)

            (75)

    (1,200)

          (300)

 

 

 

 

 

2010 Adjustments

          $0

    $5,125

        $0

         $0

 

 

 

 

 

Adjusting entry:

 

 

 

 

 

 

 

 

 

DR--Deferred tax asset--current       $5,125

 

 

 

 

CR--Deferred tax benefit                             $5,125

 

 

 

 

 

 

 

 

 

Balance Sheet Classification:

 

 

 

 

 

 

 

 

 

Net current amount:

 

 

 

 

      Deferred tax asset--current                   $5,200

 

 

 

 

      Deferred tax liability--current                    (200)

 

 

 

 

      Net current deferred tax asset               $5,000

 

 

 

 

 

 

 

 

 

Net non-current amount:

 

 

 

 

      Deferred tax asset--non-current           $    300

 

 

 

 

      Deferred tax liability--non-current            1,200

 

 

 

 

      Net non-current deferred tax liablility    $ (900)

 

 

 

 

 

 

 

 

 

Footnote Disclosures:

 

 

 

 

 

 

 

 

 

Deferred tax asset:

 

 

 

 

      Current                                                  $5,200

 

 

 

 

      Non-current                                               300

 

 

 

 

      Total deferred tax asset                        $5,500

 

 

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

     Current                                                  $   200

 

 

 

 

     Non-current                                             1,200

 

 

 

 

     Total deferred tax liability                      $1,400

 

 

 

 

 

 

 

 

 

 

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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