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Deferred Tax Assets and Deferred Tax Liabilities

How are deferred tax assets and deferred tax liabilities derived? How do they relate to the difference between tax expense and taxes payable? How could an organization have a tax receivable? Why is the tax expense reported on the income statement comprised of current and deferred tax?

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How are deferred tax assets and deferred tax liabilities derived?

Deferred Tax Liabilities

A deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years. For example, a temporary difference is created between the reported amount and the tax basis of an installment sale receivable if, for tax purposes, some or all of the gain on the installment sale will be included in the determination of taxable income in future years. Because amounts received upon recovery of that receivable will be taxable, a deferred tax liability is recognized in the current year for the related taxes payable in future years.

Deferred Tax Assets

A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards. For example, a temporary difference is created between the reported amount and the tax basis of a liability for estimated expenses if, ...

Solution Summary

This solution discusses how deferred tax assets and deferred tax liabilities are derived.

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