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| *Ostroff, Fair and Company>>>India Taxes |
To explain about defered tax liability.describe about permenant difference&timing difference.give example? |
give some example for differences. and show some computation how to calculate deffered tax liabilit&asset PERMANENT DIFFERENCE. Example: the current Income Tax Law does not allow the deduction of entertainment expenses as part of travel expenses of employees. This means the amount WILL be considered in determining the year's NET INCOME but it will never be considered in determining Income Tax. TIMING DIFFERENCE. A company pays an insurance premium that covers 2 years. According to Mexican GAAP, the amount must be amortized (carried over to expenses) in two years. The current Income Tax Law however, only allows the deduction of insurance premiums in the year in which they are paid. The TOTAL amount paid WILL be considered in determining net income and Income Tax, but it will do so at different moments. DEFERRED INCOME TAXES Company: X, Corp. Year:2005 Insurance Premiums $5,000 dls. (2 years) Entertainment Expenses $4,500 dls. Machinery and Equipment $1,000,000 dls. (purchased in 2003) Depreciation Rate (accounting) = 20% (straight line method) Accelerated tax depreciation = 1 year (for practical purposes I considered that 100% of the asset would be deductible) At December 31, 2005: PREPAID INSURANCE Book Value = $2,500 (Because half was amortized in 2005) Tax Value = $0 (Because it was completely deducted in 2005) Temp.Diff. = ($2,500) The difference is a TAXABLE DIFFERENCE because in the year in which the difference will reverse (2006), income tax will be computed over a higher base than net income (a deduction of $2,500 will be considered in determining net income, but not in determining income tax for the year). ENTERTAINMENT EXPENSES Expense = $4,500 Tax deductible = $ 0 Perm.Diff. = (4,500) This difference will not be considered in computing deferred taxes. MACHINERY AND EQUIPMENT Book value = $700,000 (3 years depreciation of $300,000) Tax Value = $ 0 (It was completely deducted in 2003) Temp.Diff. =($700,000) The difference is a TAXABLE DIFFERENCE because during the the following 7 years in which the difference will reverse, income tax will be computed over a higher base than net income (Book value in 2006, $600,000; in 2007, $500,000; and so on). Total Temporary Differences = $704,500 Enacted Tax Rate = 32% Deferred Tax Liability = $225,440. Remember that taxable temporary differences give way to deferred tax liabilities. HOPE THIS HELPS!!! Feel free to contact me if you should have any more questions. Source(s): Accountant / Financial Statement Auditor. Kindly visit AS-22 the standard itself contains a wonderful wexample to understand. Thanks Still in doubt contact at goindiainsurance@gmail.com |
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