Tax base, carrying amount, DTA and DTL

In the current year, Michaels Company has a carrying amount of USD3,500,000 and tax base of USD5,000,000 for accounts receivable. Michaels will most likely recognize:

  1. A.a deferred tax asset.
  2. B.a deferred tax liability.
  3. deferred tax asset or liability.


A is correct. Because the carrying amount is less than the tax base for this asset, this difference is a temporary difference that will result in a deferred tax asset. B is incorrect because a deferred tax liability would apply if the carrying amount was greater than the asset base. C is incorrect because this is not a permanent difference thus there will be either a deferred tax asset or deferred tax liability.

In my logic, higher Tax base of 5M will make the Depreciation expense higher in the future, which decrease the profit and tax payable compared to the 3.5M of Carrying amount on BS. So when the tax payable < accounting tax → DTL happens.

Anyone viewpoint!!

Asset started off with value of, for example, $10m

Tax depc (5m) < f.accts dper (6.5m)

The company have been historically paying more cash tax to tax man than f.accts have charged. This will result in DTa.

For example next year
Co, depreciate in fin.accts and tax accounts another $3.5
making the value $0 in fin. accts and $1.5 in tax accounts.

The years after in tax accouns they still have $1.5 of depreciation to offset against tax

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make sense!


Got it

I did an edit. Hope it makes sense.

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