Revenue, taxes, and leases
The Deferred Tax Direction
Future deductible means DTA, future taxable means DTL, permanent differences mean nothing, all measured at the enacted future rate.
How the exam words it
- -The stem gives a book-tax difference (warranty accrual, excess tax depreciation, municipal interest) and asks 'what is the deferred tax effect?'.
- -It gives pretax book income and differences and asks for 'total income tax expense'.
- -A rate change is enacted and it asks 'what adjustment should be recorded?'.
- -Realization is doubtful and it asks about a valuation allowance, often with an NOL carryforward.
The playbook
- 1Sort each difference: permanent items (municipal interest, fines) never reverse, so they change the effective rate but create no deferred taxes.
- 2Set the direction: book expense before the tax deduction (warranties, bad debts) creates a DTA; tax deduction before book expense (accelerated depreciation) creates a DTL.
- 3Measure at the enacted rate for the years the difference reverses, and remeasure through income tax expense when a new rate is enacted.
- 4Total expense = current + deferred (often book income excluding permanents times the rate), and a valuation allowance offsets any DTA not more likely than not to be realized.
The trap
Creating deferred taxes on a permanent difference. Municipal bond interest never reverses, so it changes the effective rate, not the deferred tax accounts.
How the exam varies it
The same pattern, re-skinned along these axes:
DTA versus DTL versus permanent differenceOne difference versus a mixed listInitial measurement versus rate-change remeasurement versus valuation allowance
Drill this pattern
8 questions of The Deferred Tax Direction from across the AUD topics. Clear it by getting 5 right with a streak of 3.