Calculation of Tax Expense, Income Tax Payable, Deferred Tax Asset / Liability

Financial Reporting and Analysis

LOS D requires us to:

calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate.

The terms, tax expense, income tax payable, deferred tax assets, and liability have been explained in detail above. We can now explain their calculations with the help of the following example:

Example:

Suppose the income statement of a firm as per the tax return were:

Particulars	Year 1 ($)	Year 2 ($)
Revenue	1,000,000.00	1,000,000.00
Warranty Expense	0.00	10,000.00
Taxable Income	1,000,000.00	990,000.00
Tax Payable (50 % of taxable income)	500,000.00	495,000.00
Profit After Tax	500,000.00	495,000.00

Now, suppose the income statement for the financial reporting purpose is:

Particulars	Year 1 ($)	Year 2 ($)
Revenue	1,000,000.00	1,000,000.00
Warranty Expense	5,000.00	5,000.00
Taxable Income	995,000.00	995,000.00
Tax Payable (50 % of taxable income)	497,500.00	497,500.00
Profit After Tax	497,500.00	497,500.00

From the above two statements, we can find the required, i.e. income tax expense, tax payable, and change in the deferred tax (asset/liability). These are:

Particulars	Year 1 ($)	Year 2 ($)
Income Tax Expense	497,500.00	497,500.00
Tax Payable	500,000.00	495,000.00
Change in Deferred Tax	2,500.00 (Asset)	0.00 (DTA canceled)

Kindly note that the negative difference between the tax payable and income tax expense in the second year gets canceled with the deferred tax asset created in the first year.