31c: Deferred tax liability calculations "reversal?"

[mlwl8521]

We have a machine with

• Purchase price of 100k
• Salvage value of zero
• Useful life of 10 years according to finance
• Useful life of 5 years according to taxes
• That is sold after 1 year for 100k
• The tax rate is 30%

After one year, the financial calculations give us a carrying value (am I using this term correctly) of 90k, but the tax system gives us a carrying value of 80k.
The profit according to finance is 10k, but the profit according to tax is 20k. We have overused the tax benefits of depreciation, so there is a Deferred Tax Liability of 3k (30% of 10,000) on the books. Am I right so far?
The textbook says something like:
Sale of the machine for 100k would result in a gain of 10k on the income statement and 20k on the tax return. This would reverse the deferred tax liability.
What does the last line mean? Does the reversal mean that it will turn into a Deferred Tax Asset? Does it mean that the gain will be reflected in Investing Cash Flow section? Or does it mean that the DTL will be removed from the balance sheet?

 

[S2000magician]

It means that the $3,000 DTL will be removed from the balance sheet. Your CFI will show +$100,000 from the sale of the machine. You will have to pay taxes on the $20,000 taxable gain. You will show a gain of $10,000 on the income statement.

 

[mlwl8521]

S2000magician wrote:
It means that the $3,000 DTL will be removed from the balance sheet. Your CFI will show +$100,000 from the sale of the machine. You will have to pay taxes on the $20,000 taxable gain. You will show a gain of $10,000 on the income statement.

Let’s pretend I bought the machine in January 2013 and sold it January 2014
Okay, on the CFI, you claim I will show 100k (20k gain). Where on the January 2014 CFI statement would it indicate that the value of the equipment sold is 80k?

 

[S2000magician]

The January, 2014 cash flow statement won’t show $80,000; there is no $80,000 cash flow. The cash flow statement shows only cash flows; it will show a cash (in)flow of $100,000 (the sale proceeds).
The balance sheet will show a net value of $90,000, so the income statement will show a $10,000 gain. The tax schedule will show a net value of $80,000, so the tax return will show a gain of $20,000.