Attel

Temporary differences between the reported amount of an asset or liability in the financial statements and its tax basis are primarily caused by revenues, expenses, gains, and losses being included in taxable income in a year earlier or later than the year in which they are recognized for financial reporting purpose, although there are other, less common, events that can cause these temporary differences. Some temporary differences create deferred tax liabilities because they result in taxable amounts in some future year(s) when the related assets are recovered or the related liabilities are settled (when the temporary differences reverse). An example is the receivable created when installment sale gross profit is recognized for financial reporting purposes. When this asset is recovered, taxable amounts are produced because the installment sale gross profit is then recognized for tax purposes. Some temporary differences create deferred tax assets because they result in deductible amounts in some future year(s) when the related assets are recovered or the related liabilities are settled (when the temporary differences reverse). An example is the liability created when estimated warranty expense is recognized for financial reporting purposes. When this liability is settled, deductible amounts are produced because the warranty cost is then deducted for tax purposes. The deferred tax liability or asset each year is the tax rate times the temporary difference between the financial statement carrying amount of the receivable or liability and its tax basis.

Question 16-3

Future deductible amounts mean that taxable income will be decreased relative to pretax accounting income in one or more future years. Two examples are (a) estimated expenses that are recognized on income statements when incurred, but deducted on tax returns in later years when actually paid and (b) revenues that are taxed when collected, but are recognized on income statements in later years...