Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran will depreciate the asset using the straight-line method over a 10-year period with no salvage value. For tax purposes the asset will be depreciated straight line for five years and Corcoran’s effective tax rate is 30%. Corcoran’s deferred tax liability for 2004 will: A) decrease by $50,000. B) increase by $15,000. C) decrease by $15,000. The answer is C, and I understand all the math behind it, but why is this an increase to an existing liability and not an asset? If for tax purposes, its being depreciated for five years, wouldn’t that $15,000 difference ($50,000 x 30%) be considered an asset? Can somebody please explain? Thanks!
Shouldnt the answer be B? Higher depreciation is recognized for tax, so taxes payable will be lower then tax expense.
Yeah, I put B. Q-Bank is telling me C.
ans is B Carrying value of asset > tax base of asset => DTL is created
C is the answer. You pay less (in cash) tax this year than what you say you will pay (in your income statement) --> you owe the government --> liability since you will pay it some time in future. Think like accounts payables --> you have recognized the expense but not paid the vendors
elcfa Wrote: ------------------------------------------------------- > C is the answer. > > You pay less (in cash) tax this year than what you > say you will pay (in your income statement) --> > you owe the government --> liability since you > will pay it some time in future. > > Think like accounts payables --> you have > recognized the expense but not paid the vendors Why shouldn’t it be an increase in DTL then since you owe more?
Revenant are right. I meant B. A bit too quick at typing there 
Answer is B Today the depreciation expense in tax return is $100,000 whereas in accounts it is $50,000. thus as per tax return income will be less by $50,000. the same will reverse after five years when depreciation expense as per tax return will be nil and as per accounts it will be $50,000. so more taxable income will be the result and more taxes has to be paid. Thus, a deffered tax liablility has to be recognized for the same in the current years’ financial statements ($50000*30%) $15,000.
Anytime you’re depreciating an asset (for tax purposes) faster than for accounting purposes, you’re going to see a DTL for the first year.
i don’t understand why this is an increase in $15,000 in a DTL. I thought this would be an increase in $15,000 DTA as the taxes paid are quicker than reported on the financial statement and therefore the increase would increase the DTA that would be gained over time?
You’re not paying the taxes faster; rather, you’re claiming deductions against taxable income before you would on a GAAP basis.