[ELMON]

As a result of differences between depreciation for financial reporting purposes and TAX purposes, the financial reporting basis of Noor Co.’s sole DEPRECIABLE ASSET, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1. The difference will reverse in future years. The enacted tax rate is 30% for 20X1 and 40% for future years. Noor has no other temporary differences. In its December 31, 20X1, BALANCE SHEET, how should Noor report the deferred tax effect of this difference?

the answer by Ninga Is (D) Deferred Tax Liability 100,000

I Want to clear that : if the financial income depreciation is more than the Tax Depreciation as stated In the Q SO that means the Financial Income Will Be Lower than taxable Income so that means the company will pay more now (taxable income is more than Financial income ) so it should be100,000 Assets not Liability answer (B)

Please Clear it to me

FAR- 88 MAY 2015
REG- 83 OCT 2015
BEC- 80 Jan 2016
AUD- 79 May 2016
NH
I am Done

Ninga MQ & SIMS Is the Best Way to Pass

[Missy]

In this problem, the financial income depreciation is LESS than the tax depreciation. The problem states “the financial reporting basis of Noor Co.'s sole DEPRECIABLE ASSET, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1”

If the basis of the asset is higher on the books than it would be for taxes, that means less depreciation has been taken on the books and D is the correct answer because it is a deferred tax liability.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[ELMON]

Thanks Mla 11692 For your Reply , But I did Not Agree With You Coz for the Following

Depreciation Base Means = Original Amount – Salvage Value (Straight Line ) so We Will Take An Example

ORIGINAL Value Is 100 And Salve Value Is 20 So The Base Is = 80 And Will Say Useful Live Is 5 So The Depreciation Exp = 16

For Tax The Base Is Less Right As The Q Stated So It Would Be 50 So The Depreciation Expense Will Be 10

So If the Tax Depreciation Is Less Than The Financial Depreciation So The Taxable Income Will Be More Than the Financial Income So Its Deferred Assets Not Liability .

FAR- 88 MAY 2015
REG- 83 OCT 2015
BEC- 80 Jan 2016
AUD- 79 May 2016
NH
I am Done

Ninga MQ & SIMS Is the Best Way to Pass

[Missy]

You are reading the question incorrectly. These are worded tricky on purpose, be careful of that on exam day. You can disagree with me, but I will let you know I am not studying for the CPA, I am a licensed CPA for > 3 years.

Lets try this another way. Lets use your example. ORIGINAL Value Is 100 And Salve Value Is 20 So The Base Is = 80 And Will Say Useful Live Is 5 So The Depreciation Exp = 16. After 1 year your BOOKS show a value of 84k (100k purchase price minus 16k depreciation expense.) 84k is your FINANCIAL REPORTING BASIS for the asset.

The problem says your financial reporting basis(84k for this asset plus whatever other assets works out to greater than 250k) exceeds your tax reporting basis of 250k. That means that MORE depreciation expense has been realized for tax purposes than book purposes. (Have you studied section 179 at all? This is one reason tax depreciation would exceed book depreciation.) The tax depreciation is MORE than the financial depreciation.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Missy]

Just remember this, regardless of all of the details you tried to add to your scenario, the depreciable base has NOTHING to do with the question except to determine the annual depreciation.

Financial basis is and always will equal the purchase amount less the accumulated book depreciation. Thats all.

Tax basis is and always will equal the purchase price less the accumulated tax depreciation.

Since the purchase price is the same for both the only way financial basis exceeds tax basis is if more deprecition expense has been taken for tax.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[ELMON]

thanks Mla

I got it , Many thanks

FAR- 88 MAY 2015
REG- 83 OCT 2015
BEC- 80 Jan 2016
AUD- 79 May 2016
NH
I am Done

Ninga MQ & SIMS Is the Best Way to Pass

[ELMON]

you mean “the financial base exceeds the Tax base ” that means in financial books is taken Less depreciation than tax that will lead the taxable income less than financial income so its deferred tax liability

ya may exam after 4 days hahah , i want to clear these things , may it helps

many thanks

FAR- 88 MAY 2015
REG- 83 OCT 2015
BEC- 80 Jan 2016
AUD- 79 May 2016
NH
I am Done

Ninga MQ & SIMS Is the Best Way to Pass

[Oimie]

@mla11692: Thanks!! I had the same problem! That wording though ㅎ_ㅎ

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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