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