- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 27. Income Taxes
- Subject 4. Temporary versus Permanent Differences
CFA Practice Question
Taxable temporary differences result in a deferred tax ______ when the tax base of an asset is ______ than its carrying amount.
A. asset; less
B. liability; more
C. liability; less
Explanation: Or when the tax base of the liability exceeds its carrying amount.
User Contributed Comments 6
| User | Comment |
|---|---|
| jpducros | I learned it by heart but I have difficulties in understanding what the mean by carrying amount and tax base of asset/liability and the sign of the equation. Anyone ? |
| Vedo | well, it is tough, but what i get is there is an asset on the balance sheet, and if it's tax base less then the carrying amount thank a liability is created to account for it. |
| dan1987 | Asset purchased for 1000$ Carry Amount Depreciated straight line and Tax Base i.e. the amount taxable income it calculated uses 25% depreciation tax = 35% Y0 Y1 Y2 Y3 Y4 Carry 1000 8000 6000 4000 2000 Tax |
| dan1987 | Y0 Y1 Y2 Y3 Y4 Carry 1000 800 600 400 200 Tax 1000 750 563 422 316 Diff 0 50 34 -22 -116 Def A/L 0 18 13 -8 -41 If Asset purchased flip if taking about a liability Y1 & Y2 Def Liab as Carry > Tax Y3 & Y4 Def Asset as Carry < Tax |
| michaeloa3 | Here's how I think about it; Tax base of an asset is the amount that's tax deductible in the future. Tax base of liability is inverse or said another way the amount that's taxable in the future |
| rjdelong | Carry is for the fin report, tax base is for the tax return. Other than that they both represent how much value (asset) or debt (liability) you have yet to write off to each party - stockholders or IRS. It seems easier to think in terms of which is less since the one that is less is the one you've depreciated more and avoided more tax on upfront and will have to pay more on to catch up later. If the lesser of the two is on the tax base you have depreciated more to the IRS and deducted more so it means you have a def tax liability for later. If the tax base is higher, that means you wrote off more on the fin report than on the tax report and paid more taxes now which would result in the Def Tax Asset (owe less later). If you are talking about a liability everything is the opposite. |