Example of deferred tax on Provision for expenses

Example of deferred tax on Provision for expenses

Provision for warranty	50,000
Tax Rate	15%
Tax Deduction allowed	Actual warranty claims

Calculate the deferred tax?

Solution

Steps for Solution

1. Determine nature of Temporary difference i.e. taxable or deductible temporary difference

2. Apply the Tax Rate

Rules for determining the Temporary Difference

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

Tip of solving the example

For liability use negative value and compare with tax bases and for asset use positive value and compare with tax bases.

1. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	(50,000)	0	50,000	D.D.T*

Deductible temporary Difference

2. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	50,000	15%	7,500

In above example the tax credit was available on actual warranty; this means the carrying amount would be a liability and we must use negative value for liability and then compare it with the tax base i.e. zero in this example (no tax deduction is allowed for provision).  This would result in a deductible temporary difference and deferred tax asset.