Explanation of Deferred Tax Expense and Benefits:
The amount of Deferred Tax Liability (or Deferred Tax Assets) on the Balance sheet will be
calculated based on Future Taxable amounts (or Future Deductible Amounts) times enacted
future tax rates for the respective year.
The change in DTL or DTA on the Balance sheet is amounts reported on the Income statement.
If you have an increase in DTL or decrease in DTA then, there would be Deferred Tax Expense
on Income Statement (this one I refer to as Deferred Tax on Income statement during the
tutorial)
If you have an increase in DTA or decrease in DTL, then there would be Deferred Tax Benefit
Use the example in the tutorial, here is the calculation using the IS appoach
Year 1
Year 2
Year 3
Pretax financial
1000
2000
3000
income
Book Depreciation
100
100
100
Tax Depreciation
(300)
Taxable Income
800
2100
3100
Income Tax
200
400
600
Expense(20%)
Tax Payable (20%)
160
420
620
Deferred Tax
40
(20)
(20)
Expense (Benefits) or
↑ or (↓) in DTL
Alternatively (more correct) you could calculate using the balance sheet approach For year 1:
Future Taxable
Amount
Rate
DTL at end of year 1
(on Balance sheet)
Deferred tax expense
(benefits)
Year 1 = Total Y2 +Y3 Year 2
100
40
20%
20
Year 3
100
20%
20
40-0=40
Similarly you could calculate Deferred tax for year 2 and Year 3 as follows:
DTL on BS
Deferred Tax
Expense (Benefits) or
↑ or (↓) in DTL
Year 1
40
40
Year 2
20
(20)
Year 3
0
(20)
Correction for Problem 15.14
Diclosure of the Deferred Tax Asset and the Allowance to Reduce DTA to Expected Realizable
Value would be as follows as at the end of 2008:
Balance sheet
Assets:
Deferred Tax Assets
180,000 (This is corrected figure)
Less Allowance tor Reduce DTA to ERV
(30,000)
Deferred Tax Assets (net)
150,000