University:
Sloan School of Management
Course:
15.511 | Financial Accounting
Academic year:

2023
Views:

316

Pages:

4
Author:

knirkinadd

Depreciation and Deferred Taxes Corporate Accounting Tax and Timing Effects Tax Depreciation Tax Reporting ≠ Financial Reporting ==> timing differences in measurement of income Accelerated depreciation No judgment in determining depreciation expense Why would a firm prefer accelerated depreciation for tax purposes? Why does government allow this? Why not use the tax method for financial reporting? Different depreciation for tax and financial reporting gives rise to Deferred Taxes Deferred Tax Expense Is deferred tax expense a line item expense on the income statement? If not where is it? No It is a component of reported income tax expense What is the journal entry? (Recall: Income tax expense = taxes payable + deferred tax expense) Dr Income tax expense Cr Tax payable Cr Deferred tax liability 15,000 7,800 7,200 Deferred Taxes over Time Deferred taxes caused by timing differences are temporary; they reverse over time. Year Year 2000 2001 2002 Financial reporting depreciation 30,000 30,000 30,000 Tax Depreciation Deferred Acc. Depr reporting difference Tax Difference, (EB) depreciation Expense 54,000 24,000 7,200 24,000 36,000 6,000 1,800 30,000 (30,000) (9,000) 0 Def Tax Liability (EB) 7,200 9,000 0 Timing differences that create / increase deferred taxes are called originating differences Timing differences that remove / decrease deferred taxes are called reversing differences