Fixed Asset Cost $50,000; 5year life; no residual value

Tax rate = 40%

Depreciated on a straight line basis for book purposes, MACRS for tax purposes

Pretax Financial Income

100,000
120,000
125,000
110,000
150,000

Year
2010
2011
2012
2013
2014

Financial
Depreciation
Expense
10,000
10,000
10,000
10,000
10,000

Tax
Depreciation
MACRS
30,000
15,000
5,000

Book Value
of Asset
40,000
30,000
20,000
10,000
-

Tax Basis
of Asset
20,000
5,000
-

Cumulative
Difference
20,000
25,000
20,000
10,000
-

Originating
(Reversing)
Difference
20,000
5,000
(5,000)
(10,000)
(10,000)

After year 1 we have a fixed asset with a tax basis of 20,000 and a book value of 40,000; a difference of 20,000. This 20,000 originated in year 2010.
The difference is caused by the early write-off of the fixed asset for tax purposes. The entire 50,000 will be written off for both book and tax purposes,
but the timing is different under the two methods. Therfore, whatever differences arise in the early years of the asset will reverse themselves in later
years. So the 20,000 difference in the asset value for tax and book purposes (and the related depreciation expense{a financial accounting term} and
deduction{a tax accounting term}) will reverse over the course of the asset's life. We know that by taking the depreciation charges allowed by MACRS
in the early years, that they will not be available to take in later years. This causes us to have to pay less tax in the early years, but more taxes in later
years. In other words, it causes taxable income (and therefore taxes payable) in early years to be less, but greater in future years. These tax amounts
we will have to pay in future years, as a result of charging the depreciation off at an excellerated rate in the early years, results in a measurable tax liability
called deferred tax liability.
Year 2010
Calculation of Deferred tax and tax expense:
Book basis of asset
40,000
Tax basis of asset
20,000
Cumulative Temporary Diff.
20,000
Tax rate
40%
Deferred tax liability year end
8,000
Deferred tax liabiltiy, beginning
Deferred tax expense (benefit)
8,000
Current tax Expense
32,000
Income tax expense
40,000

Calculation of taxable income:

Pre-tax Income
100,000
Temp Diff FTA Orig.
(20,000)
Taxable income
80,000
Tax Rate
40%
Tax Payable
32,000

Income tax expense

Income tax payable
Deferred tax liabiltiy

Year 2011
Calculation of Deferred tax and tax expense:
Book basis of asset
30,000
Tax basis of asset
5,000
Cumulative temporary diff.
25,000
Tax rate
40%
Deferred tax liability, end
10,000
Deferred tax liability, beginning
8,000
Deferred tax expense (benefit)
2,000
Current tax expense
46,000
Income tax expense
48,000

40,000
32,000
8,000

Calculation of taxable income:

Pretax income
120,000
Temp diff FTA Orig.
(5,000)
Taxable income
115,000
Tax Rate
40%
Tax Payable
46,000
Income tax expense
Income tax payable
Deferred tax liabiltiy

Year 2012
Calculation of Deferred tax and tax expense:
Book basis of asset
20,000
Tax basis of asset
Cumulative temporary diff.
20,000
Tax rate
40%
Deferred tax liability, end
8,000
Deferred tax liability, beginning
10,000
Deferred tax expense (benefit)
(2,000)
Current tax expense
52,000
Income tax expense
50,000

48,000
46,000
2,000

Calculation of taxable income:

Pretax income
125,000
Temp diff FTA Revs.
5,000
Taxable income
130,000
Tax Rate
40%
Tax Payable
52,000
Income tax expense
Deferred Tax Liabilbiy
Income tax payable

Year 2013
Calculation of Deferred tax and tax expense:
Book basis of asset
10,000
Tax basis of asset
Cumulative temporary diff.
10,000
Tax rate
40%
Deferred tax liability, end
4,000
Deferred tax liability, beginning
8,000
Deferred tax expense (benefit)
(4,000)
Current tax expense
48,000
Income tax expense
44,000

50,000
2,000
52,000

Calculation of taxable income:

Pretax income
110,000
Temp diff FTA Revs.
10,000
Taxable income
120,000
Tax Rate
40%
Tax Payable
48,000
Income tax expense
Deferred Tax Liabilbiy
Income tax payable

Year 2014
Calculation of Deferred tax and tax expense:
Book basis of asset
Tax basis of asset
Cumulative temporary diff.
Tax rate
40%
Deferred tax liability, end
Deferred tax liability, beginning
4,000
Deferred tax expense (benefit)
(4,000)
Current tax expense
64,000
Income tax expense
60,000

44,000
4,000
48,000

Calculation of taxable income:

Pretax income
150,000
Temp diff FTA Revs.
10,000
Taxable income
160,000
Tax Rate
40%
Tax Payable
64,000
Income tax expense
Deferred Tax Liabilbiy
Income tax payable

60,000
4,000
64,000

Income Statement Presentation includes both current and deferred portion of the income tax expense. See page 973.
2010
2011
2012
2013
2014
Pretax financial income
100,000
120,000
125,000
110,000
150,000
Income tax expense:
Current
32,000
46,000
52,000
48,000
64,000
Deferred
8,000
2,000
(2,000)
(4,000)
(4,000)
Income tax expense
40,000
48,000
50,000
44,000
60,000
Net Income

60,000

72,000

75,000

66,000

90,000

Year 2013
Temporary differences:
We have gross profit fully recognized on the income statement from installment type sales of $560,000 using the accrual meth
gross profit is deferred for tax purposed (installment method). This creates futre taxable amounts.

We have straight line depreciation recognized on the income statement of $90,000; but can deduct $108,000 on the tax return

We have warranty expense accrued in the amount of $200,000, but the tax law forces us to recognize warranty costs on a cas
remaining amount of $156,000 will be not be deductible until future years.

Perminant differences:
We have tax free interest on municiple bonds of $28,000, and non-deductible fines we had to pay, recorded on the books as e
Pretax financial income
Installment gross profit deferred FTA
Excess tax depreciation FTA
Warranty expense not deducted FDA
Tax free interest income
Nondeductible fines
Taxable income
Tax Rate
Income tax currently payable

412,000
(448,000)
(18,000)
156,000
(28,000)
26,000
100,000
50%
50,000

Cumulative temporary differences

Installment gross profit
Excess tax depreciation
Warranty expenses deferred
Totals

Deferred tax asset ending

Deferred tax asset beginning
Deferred tax expense (benefit)
Deferred tax liability ending
Deferred tax liability beginning
Deferred tax expense (benefit)
Partial Income Statement
Pre tax income
Income tax expense:
Current
Deferred (net)
Income tax expense:
Net income

Year 2014
Collected $112,000 of the installment gross profit recognized in previous year, reducing the future taxable amount (cumulative

Sold new installment contracts that will result in collecting $256,000 of gross profit in future years, pushing the future taxable a

Had additional excess depreciation charges of $82,800, pushing the cumulative difference up to $100,800 (i.e. 18,000 + 82,80

Expenses warranty costs of $180,000 on the income statement, paid out warranty costs of $106,000, thereby increasing the fu
(i.e. 156,000 + (180,000 - 106,000 )

Pending litigation resulted in accruing a loss for financial reporting purposes of $172,000. This future deductible amount is not

Tax free interest income amounted to 24,000, and pretax income is $504,800
Pretax financial income
Collection of installmant GP (reverse)
Deferral on installment GP (originating)
Excess tax depreciaiton (originating)
Warranty expensed (originating)
Warranty paid (reversing)
Pending litigation expense (originating)
Tax free interest (permanent)
Taxable income
Rate
Taxes currently payable

504,800
112,000
(256,000)
(82,800)
180,000
(106,000)
172,000
(24,000)
500,000
40%
200,000

Cumulative temporary differences

Installment gross profit FTA
Excess depreciation (FTA)
Warranty costs (FDA)
Litigation charges (FDA)
Totals
Deferred tax asset ending
Deferred tax asset beginning
Deferred tax expense (benefit)
Deferred tax liability ending
Deferred tax liability beginning
Deferred tax expense (benefit)
Partial Income Statement
Pre tax income
Income tax expense:
Current
Deferred (net)
Income tax expense:
Net income

of $560,000 using the accrual method required by GAAP, but $448,000 of the

deduct $108,000 on the tax return, also future taxable amounts

recognize warranty costs on a cash basis. We only paid out $44,000 this year, so the

to pay, recorded on the books as expenses, in the amount of $26,000.

Amount Tax Rate

448,000
40%
18,000
40%
(156,000)
40%
310,000

(62,400)
(62,400)

Deferred Tax
(Asset)
Liability
179,200 current
7,200 long term
(62,400)
current
(62,400) 186,400

Income tax expense

Deferred tax asset
Deferred tax liability
Income tax payable

174,000
62,400
186,400
50,000

186,400
186,400

412,000
50,000
124,000
174,000

Partial Balance Sheet

Current assets: Deferred tax asset
Current liabilities: Deferred tax liability
Income tax payable
Long term liabilities: Def. tax liab

Netted against current liabilities

116,800
50,000
7,200

238,000

future taxable amount (cumulative difference) down to $336,000 (i.e. 448,000 - 112,000)

years, pushing the future taxable amount (cumulative difference) back up to $592,000 (i.e. 336,000 + 256,000)

up to $100,800 (i.e. 18,000 + 82,800)

$106,000, thereby increasing the future deductible amount (cumulative difference) up to 230,000

his future deductible amount is not deductible for tax purposes until paid.

Amount
592,000
100,800
(230,000)
(172,000)
290,800
(160,800)
(62,400)
(98,400)
277,120
186,400
90,720

504,800
200,000
(7,680)
192,320

Rate
40%
40%
40%
40%

Deferred Tax
(Asset)
Liability
236,800
40,320
(92,000)
(68,800)
(160,800) 277,120

current
long term
current
non-current

Income tax expense

Deferred tax asset
Deferred tax liability
Income tax payable

192,320
98,400

Partial Balance Sheet

Current assets: Deferred tax asset
Other assets - noncurrent
Current liabilities: Deferred tax liability
Income tax payable

90,720
200,000

Netted against current liabilities

28,480
144,800
200,000

312,480
Long term liabilities: Def. tax liab

netted against asset

Year 2006
Temporary differences:
We have gross profit fully recognized on the income statement from installment type sales of $560,000 using the accrual meth
gross profit is deferred for tax purposed (installment method). This creates futre taxable amounts.

We have straight line depreciation recognized on the income statement of $90,000; but can deduct $108,000 on the tax return

We have warranty expense accrued in the amount of $200,000, but the tax law forces us to recognize warranty costs on a cas
remaining amount of $156,000 will be not be deductible until future years.

Perminant differences:
We have tax free interest on municiple bonds of $28,000, and non-deductible fines we had to pay, recorded on the books as e
Pretax financial income
Installment gross profit deferred FTA
Excess tax depreciation FTA
Warranty expense not deducted FDA
Tax free interest income
Nondeductible fines
Taxable income
Tax Rate
Income tax currently payable

412,000
(448,000)
(18,000)
156,000
(28,000)
26,000
100,000
50%
50,000

Cumulative temporary differences

Installment gross profit
Excess tax depreciation
Warranty expenses deferred
Totals

Deferred tax asset ending

Deferred tax asset beginning
Deferred tax expense (benefit)
Deferred tax liability ending
Deferred tax liability beginning
Deferred tax expense (benefit)
Partial Income Statement
Pre tax income
Income tax expense:
Current
Deferred (net)
Income tax expense:
Net income

Year 2007
Collected $112,000 of the installment gross profit recognized in previous year, reducing the future taxable amount (cumulative

Sold new installment contracts that will result in collecting $256,000 of gross profit in future years, pushing the future taxable a

Had additional excess depreciation charges of $82,800, pushing the cumulative difference up to $100,800 (i.e. 18,000 + 82,80

Expenses warranty costs of $180,000 on the income statement, paid out warranty costs of $106,000, thereby increasing the fu
(i.e. 156,000 + (180,000 - 106,000 )

Pending litigation resulted in accruing a loss for financial reporting purposes of $172,000. This future deductible amount is not

Tax free interest income amounted to 24,000, and pretax income is $504,800

$560,000 using the accrual method required by GAAP, but $448,000 of the

educt $108,000 on the tax return, also future taxable amounts

ecognize warranty costs on a cash basis. We only paid out $44,000 this year, so the

pay, recorded on the books as expenses, in the amount of $26,000.

Amount Tax Rate

448,000
40%
18,000
40%
(156,000)
40%
310,000

(62,400)
(62,400)

Deferred Tax
(Asset) Liability
179,200 current
7,200 long term
(62,400)
current
(62,400) 186,400

Income tax expense

Deferred tax asset
Deferred tax liability
Income tax payable

174,000
62,400
186,400
50,000

186,400
186,400

412,000
50,000
124,000
174,000

Partial Balance Sheet

Current assets: Deferred tax asset
Current liabilities: Deferred tax liability
Income tax payable
Long term liabilities: Def. tax liab

Netted against current liabilities

116,800
50,000
7,200

238,000

ture taxable amount (cumulative difference) down to $336,000 (i.e. 448,000 - 112,000)

ears, pushing the future taxable amount (cumulative difference) back up to $592,000 (i.e. 336,000 + 256,000)
to $100,800 (i.e. 18,000 + 82,800)

06,000, thereby increasing the future deductible amount (cumulative difference) up to 230,000

s future deductible amount is not deductible for tax purposes until paid.