Deferred Tax Assets and Liabilities

Lesson

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Taxes are computed a little differently than traditional accounting books.

Tax authorities are more interested in when cash enters and leaves a company, while most accounting books are concerned with accrurals.

Sometimes there's a bit of confusion when differences between the two show up.

Sometimes a company receives cash, but hasn't earned it yet. This happens every time there is unearned revenue.

Sometimes a company completes a job, but hasn't yet received cash.

This is where deferred tax assets and deferred tax liabilities come in.

Deferred Tax Assets - When tax payable is higher than the income tax expense (it can be applied in future years to reduce taxes)
Deferred Tax Liabilities - When tax pable is lower than the income tax expense (it will be applied in future years and increase taxes)

Question

Juliet Corp., the ever-maligned unicycle manufacturer, has an ongoing relationship with a client, and sent it a bill for services rendered of $56,000.00.

Just before the end of the year, it received payment from the client for $64,000.00. The current tax rate is 30%.

What is the tax asset or tax liability?

Answer

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👉 Answer:

There is a $2,400.00 deferred tax asset.

👨‍🎓 This is how we solve it:

First, remember the formula for the the amount of money above (or below) the amount earned that has been paid.
EXCESS TAX OVER BOOK = TAX REVENUE - BOOK REVENUE
Now let's fill in the numbers
$8,000 = $64,000.00 - $56,000.00
Finally, multiply the excess or deficit from above by the tax rate.
DEFERRED TAX = EXCESS TAX OVER BOOK * TAX RATE
Let's plug in the numbers
$2,400.00 = $8,000 * 30%
Since the result of the above step is positive, we know that it is a deferred tax asset and not a liability.

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