DTA vs. DTL

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Submariner

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“Corp X bought an asset for $500,000. For financial reporting, Corp X depreciates the asset on a straight line basis over ten years with no salvage value. For tax purposes the asset is depreciated over five years using straight line. Their effective tax rate is 30%. Their DTL will:”
I.) Decrease by $50,000
II.) Decrease by $15,000
III.) Increase by $15,000
I thought this was relatively straight forward.
Depreciation on the financial statements = 500,000/10 = 50,000
Depreciation on tax statements = 500,000/5 = 100,000
50,000 - 100,000 = 50,000*30% = 15,000 decrease in DTLs
So it seems that their recognized taxes payable are greater than the income tax expense on the income statement. Wouldn’t that lead to the creation of a DTA?
Thanks!
 
Submariner wrote:”Corp X bought an asset for $500,000. For financial reporting, Corp X depreciates the asset on a straight line basis over ten years with no salvage value. For tax purposes the asset is depreciated over five years using straight line. Their effective tax rate is 30%. Their DTL will:”
I.) Decrease by $50,000
II.) Decrease by $15,000
III.) Increase by $15,000
I thought this was relatively straight forward.
Depreciation on the financial statements = 500,000/10 = 50,000
Depreciation on tax statements = 500,000/5 = 100,000
50,000 - 100,000 = 50,000*30% = 15,000 decrease in DTLs
So it seems that their recognized taxes payable are greater lower than the income tax expense on the income statement. Wouldn’t that lead to the creation of a DTA?
Thanks!
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If you’re depreciating it over 5 years for taxes and over 10 years for accounting, then your current year taxes will be lower (higher depreciation expense), and your future taxes will be higher. Higher future taxes is a future economic detrement: DTL.
 
The tax authorities want you to pay less taxes today due to higher expenses in the earlier years, and thus lower taxable income, compared to the amount of pre-tax income you recognize on the income statement. So you’re recognizing a tax liability that could be reversed and payed in the future.
 
Ahh…I was making a small but significant error. Thank you S2000 and MrSmart.
 
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