Example of taxable Temporary difference

Example of taxable Temporary difference

Taxable of temporary arises when carrying exceeds the tax base and taxable temporary difference give rise to deferred tax liability.

Example of taxable Temporary difference

Kirn & Co purchased a machinery charge depreciation rate is 33% while the tax authority give the capital allowances in two installments i.e. 50% each year on straight line method. Calculate deferred tax liability.

Solution

Taxable Temporary Difference Calculation

Year	Carrying Amount	Tax Base	Taxable Temporary Difference
Opening Year 01	100,000	100,000
Depreciation	( 33,000)	(50,000)
Closing Year 01	67,000	50,000	17,000
Depreciation	(33,000)	(50,000)
Closing Year 02	34,000	0	34,000

Deferred Tax Liability

Year	Taxable Temporary Difference	Tax Rate	Deferred liability
Closing Year 01	17,000	25%	4,000
Closing Year 02	34,000	25%	8,500

What is concept of recognizing the deferred liability?

Concept of recognizing the liability is that amount of 34,000 will be depreciated in next year but tax authority will not allow this as expense an organization will required to pay tax in future against 34,000 therefore a tax liability is recognized.