Deferred Tax Liabilities Lecture Notes

Overview

• Deferred Tax Liability (DTL): Tax payment postponement for certain activities, indicating that taxable income is lower than pre-tax gap income when the DTL originates.
• Implication: Lower taxable income results in lower current tax payable but increases future taxes payable.

Journal Entries

• Creation of DTL:
  • Credit the DTL when it is created.
  • Recorded as part of the journal entry for tax expense.
• Reversal of DTL:
  • Debit the DTL as the temporary difference reverses over time.

Calculation

• Amount Recorded:
  • Equal to the temporary difference multiplied by the company's tax rate.
  • Assumed consistent company tax rate for all years.

Examples of Transactions

Prepaid Expenses

• Nature: Cash payments for expenses not yet recognized.
• Effect: Higher tax deductions lead to lower taxable income and tax payable, resulting in a credit to the DTL.
• Recognition: Debit the DTL when the expense is recognized on the income statement.

Accrued Revenues

• Nature: Revenues earned and recognized on the income statement but not yet collected.
• Effect: Initially lower taxable income, leading to a credit to the DTL.
• Recognition: Debit the DTL when cash is collected.

Depreciation Expense

• Tax Reporting: Asset depreciation is often accelerated.
• Financial Reporting: Depreciation expense is spread over several periods.
• Effect: Initial higher tax deductions, lowering tax payable, and increasing the DTL.
• Recognition: Debit the DTL as depreciation expense is recognized on the income statement.

Conclusion

• Reasons for DTL Creation: Various transactions where taxable income is initially lower than pre-tax gap income.
• Resulting Impact: Postponement of taxes and creation of DTL.