ABC company shows book income of $10,000 before tax. The depreciation expense fo
ID: 2388972 • Letter: A
Question
ABC company shows book income of $10,000 before tax. The depreciation expense for the year on equipment used in arriving at that net income on the financial statements was $1,000. However, on the tax return ABC was allowed to deduct $1,500 of depreciation expense on the equipment for the year. Compute the following:1) Tax expense on the financial statements
2) Taxes paid to the federal government assuming a 30% tax rate.
3) The amount of deferred tax asset or liability on the balance sheet – note the amount and whether the item is a deferred tax asset or a deferred tax liability.
Explanation / Answer
1. tax expense on the financial statements is the income before tax times the tax rate: 10,000 * 30% = 3,000. 2. income subject to tax by the federal government will be $500 lower since depreciation expense was $500 more, so taxes paid will be: 9500*30% = 2850. 3. 150 is the deferred tax liability. It is the difference between taxes paid on the tax return and taxes per books. It is a liability because they paid 2850 and will be paying the remaining 150 in the future.