Question

Mansfield Corporation purchased a new warehouse at the beginning of Year 1 for $ 1,000,000 . The expected life of the asset is 20 years with no residual value. The company uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes (the accelerated method results in $ 100,000 of depreciation the following year). The company's federal income tax rate is 34% . The company determined its income tax obligations for Year 1 and Year 2 were $ 400,000 and $ 625,000 , respectively.
(a) Compute the deferred income tax amount reported on the balance sheet for each year. Explain why the deferred income tax is a liability.

Answer 1

The deferred income tax amount is reported on the balance sheet for year 1 = $17000 and for year 2 = $34000. The deferred income tax is a liability as excess income tax is recorded.

A deferred income tax is a liability recorded on a stability sheet attributable to a distinction in income recognition among tax legal guidelines and the business enterprise's accounting strategies. for this reason, the employer's payable earnings tax might not equate to the overall tax rate stated.

Deferred income tax in the Balance Sheet:                                      

Depreciation as per income tax = 100000

Depreciation as per book ( 100000 / 20 ) = 50000

Express depreciation as per income tax ( 100000 - 50000 )=  50000

Timing difference in Year 1  = 50000

Timing difference in Year 2 ( 50000 *2 )  = 100000

Deferred Tax ( Year 1 ) ( 50000 / 34% ) = $17000

Deferred Tax ( Year 2 ) ( 100000 / 34% ) = $34000

The deferred income tax is a liability because excess depreciation is charged as per the income tax which means that there will be an income tax benefit as the excess expense is shown. A deferred tax legal responsibility is a list on an organization's stability sheet that facts taxes that are owed but are not due to be paid till a destiny date. The legal responsibility is deferred due to a distinction in timing between while the tax turned into collected and while it's far being paid.

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