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Deferred Tax - following years

Deferred Tax - following years

I'm a self studying student and have a couple of deferred tax questions. I've searched through AWeb  and can't see that the following has been asked.

Scenario 1.

A small company buys a Van for 10,000. At year end it claims AIA in full and the van has a book value of 8,000. Therefore we have the following:-

BV - 8,000

TWDV 0

Deferred tax of 8,000 x 20% = 1,600.

So we credit the B/S with 1,600 and debit the p&l with 1,600.

My confusion is what happens in subsequent years.

Say in yr 2, the van has a book value of 6,000.

The TWDV is still 0

So is there a deferred tax charge of 6,000 x 20% = 1,200?

And does the balance sheet amount of deferred tax increase to 2,800, while there is a P&L charge of 1,200? And does the same process happen year on year until the van is disposed?

Or does something else happen?

Scenario 2

As above for year 1.

In year 2 the company disposes of the van and its sales proceeds are 1,000.

So book value is 8,000 and disposal proceeds of 1,000 give a loss on disposal of 7,000.

What happens to the deferred tax of 1,600 that's on the balance sheet? Do you just debit the 1,600 from the balance sheet and credit the P&L with it? ?Or does something else happen?

Thanks for reading. The text books only seem to illustrate what happens in yr 1.

Replies

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25th Feb 2016 16:45

Movement

The deferred tax in the balance sheet represents the tax expected to be paid in future years because of past differences between accounting and tax profits. So the balance becomes £1,200 in the second year.

This is achieved by crediting £400 deferred tax in the profit and loss account and debiting the deferred tax provision.

To think of it another way, the company is paying £400 more tax this year than the accounting profits show because the £2,000 depreciation is not a tax deductible expense. It's a part reversal of the £8,000 additional tax deduction (that created the deferred tax) from the AIA claim in the first year.

Hopefully that gives you enough to work out the second scenario on your own.

Thanks (1)
25th Feb 2016 16:46

You recalculate the deferred tax liability at the end of each accounts year as you have done.

In your case it is £1,600 at the end of year 1, £1,200 at the end of year 2 etc. 

Your calculations thus far are impeccable.

But what you are calculating is the figure to put in the balance sheet. What goes through the P&L account in each year is the entry to change the b/fwd liability into the c/fwd one.

So the figures in your P& L charge are a debit of £1,600 in year one, a credit of £400 in year 2, and so on.

I hope that helps. 

Thanks (1)
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