The original cost of an asset is $600,000. The asset has a 3-year life and no salvage value expected. For tax purposes, the asset is depreciated using an accelerated depreciation method with tax return depreciation of $300,000 in year 1, $200,000 in year 2, and $100,000 in year 3. The firm adopts straight-line method of depreciation in its income statements. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is $500,000 each year. The firm\u2019s tax rate is 40%. Calculate the firm\u2019s income tax expense, and deferred tax liability for each year of the asset\u2019s life.<\/p>\n\n\n\n
What do you understand by the term \u2018Deferred Tax\u2019? Gerald Ltd. revalued a property from a carrying value of $4 Million to its fair value of $6.2 million during the reporting period. The property cost $6.5 Million, and its tax base is $3.5 Million. The tax rate is 30%. Explain the deferred tax implications.<\/p>\n\n\n\n
The correct answer and explanation is :<\/strong><\/mark><\/p>\n\n\n\n Deferred tax<\/strong> refers to the tax that is expected to be paid or recovered in the future due to temporary differences between the accounting treatment of certain items (such as depreciation, asset revaluation, etc.) and their treatment for tax purposes. It arises when there is a discrepancy between the accounting profits recognized under the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), and the taxable profits under the tax laws. Deferred tax can either be a deferred tax liability (DTL) or a deferred tax asset (DTA) depending on whether the temporary differences will result in future taxable amounts or deductible amounts.<\/p>\n\n\n\n In the case of Gerald Ltd.<\/strong>, the company has revalued a property, which results in a temporary difference between the tax base and the carrying amount of the property. The property was revalued from a carrying value of $4 million<\/strong> to $6.2 million<\/strong>, and the tax base of the property is $3.5 million<\/strong>. The tax rate is 30%<\/strong>.<\/p>\n\n\n\n The deferred tax liability arises due to the difference between the carrying value<\/strong> and the tax base<\/strong> of the asset. The carrying value ($6.2 million) is higher than the tax base ($3.5 million), creating a taxable temporary difference of $2.7 million<\/strong> ($6.2 million – $3.5 million).<\/p>\n\n\n\n The tax impact of this temporary difference is calculated by applying the tax rate of 30%<\/strong>: Deferred Tax Liability=2.7\u2009million\u00d730%=0.81\u2009million=810,000\\text{Deferred Tax Liability} = 2.7 \\, \\text{million} \\times 30\\% = 0.81 \\, \\text{million} = 810,000<\/p>\n\n\n\n Thus, the deferred tax liability (DTL) is $810,000<\/strong>.<\/p>\n\n\n\n This deferred tax liability reflects the future tax obligation the company will incur when the temporary difference reverses. Since the carrying amount of the property is higher than its tax base, the company will pay more taxes in the future as the property depreciates or is sold at a higher value than its tax base. Therefore, the deferred tax liability represents the future tax payable on this temporary difference.<\/p>\n\n\n\n The deferred tax implication<\/strong> for Gerald Ltd. is that while the company will recognize higher accounting profits due to the revaluation of the property, it will face lower taxes in the present period (resulting in a DTL) but higher taxes in the future when the property is depreciated or sold.<\/p>\n\n\n\n In summary, deferred tax<\/strong> represents the taxes payable or receivable due to differences between accounting and tax treatments. For Gerald Ltd., the revaluation of the property creates a deferred tax liability of $810,000<\/strong> because the carrying value exceeds the tax base, resulting in future taxable amounts.<\/p>\n","protected":false},"excerpt":{"rendered":" The original cost of an asset is $600,000. The asset has a 3-year life and no salvage value expected. For tax purposes, the asset is depreciated using an accelerated depreciation method with tax return depreciation of $300,000 in year 1, $200,000 in year 2, and $100,000 in year 3. The firm adopts straight-line method of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-211373","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/211373","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=211373"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/211373\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=211373"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=211373"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=211373"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Understanding Deferred Tax and Its Implications<\/h3>\n\n\n\n
Deferred Tax Calculation for Gerald Ltd.<\/h3>\n\n\n\n
Key figures:<\/h4>\n\n\n\n
\n
Deferred Tax Liability (DTL) Calculation:<\/h4>\n\n\n\n
Explanation:<\/h4>\n\n\n\n
Conclusion:<\/h3>\n\n\n\n