“Corp X bought an asset for $500,000. For financial reporting, Corp X depreciates the asset on a straight line basis over ten years with no salvage value. For tax purposes the asset is depreciated over five years using straight line. Their effective tax rate is 30%. Their DTL will:”
I.) Decrease by $50,000
II.) Decrease by $15,000
III.) Increase by $15,000
I thought this was relatively straight forward.
Depreciation on the financial statements = 500,000/10 = 50,000
Depreciation on tax statements = 500,000/5 = 100,000
50,000 - 100,000 = 50,000*30% = 15,000 decrease in DTLs
So it seems that their recognized taxes payable are greater than the income tax expense on the income statement. Wouldn’t that lead to the creation of a DTA? Thanks!
If you’re depreciating it over 5 years for taxes and over 10 years for accounting, then your current year taxes will be _ lower _ (higher depreciation expense), and your future taxes will be higher. Higher future taxes is a future economic detrement: DTL.
The tax authorities want you to pay less taxes today due to higher expenses in the earlier years, and thus lower taxable income, compared to the amount of pre-tax income you recognize on the income statement. So you’re recognizing a tax liability that could be reversed and payed in the future.