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**Can someone please dumb this down for me? I am really struggling to understand Becker’s explanation.

Venus Corp.’s worksheet for calculating current and deferred income taxes for Year 1 follows:

Year 1

Pretax income $ 1,400

Temporary differences:

Depreciation (800)

Warranty costs 400

Taxable income 1,000

Loss carryback (1,000)

Enacted rate 30%

Year 2

Pretax income –

Temporary differences:

Depreciation (1,200)

Warranty costs (100)

Taxable income (1300)

Loss carryback 1000

Loss carryforward 300

Enacted rate 30%

Year 3

Pretax income $ 1,400

Temporary differences:

Depreciation 2,000

Warranty costs (300)

Taxable income 1,700

Loss carryback 0

Loss carryforward (300)

Enacted rate 25%

Venus had no prior deferred tax balances. In its Year 1 income statement, what amount should Venus report as:

Deferred income tax expense?

a) $350

b) $120

c) $95

d) $300

Choice “c” is correct, $95 deferred income tax expense (see calculations below). The tax rate used to compute the DTA, or DTA should be the enacted tax rate for the year the temporary difference is expected to reverse.

Year 1

Deferred tax liability

= 800 x .25 = 200

(25% used because this is the enacted

tax rate for Year 3)

Deferred tax asset

=100 x .30 = 30

(30% used because this is the enacted

tax rate for Year 2)

=300 x .25 = 75

(25% used because this is the enacted

tax rate for Year 3)

200 – 105

Deferred tax expense = 95

FAR - 76! 10/15; (65) 7/15
BEC - 82! 11/15; (74) 8/15
AUD - 01/16
REG - TBA

[jslo123]

The calculation of deferred taxes are based on when the temporary differences are reversing.

Depreciation reverses in year 3 so u gotta use the year 3 rate.

100 of 400 of warranty cost reverses in year 2 (current) so use the 30%

300 of the 400 is reversed later so use the 25%.

Then you net them together,

800*.30 = -200
100*.30 = 30
300*.25= 75

net = -95 = deferred tax expense.

Hope this helps.

AUD - 89
BEC - 92
FAR - 90
REG - 79

LETZ GET IT

[Author]

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