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Hi,
Can I check I’ve understood deferred tax correctly.
Suppose you bought an asset for $400,000 which you will depreciate over 5 years. Capital allowance is 100% in the first year. Tax rate is 20%.
So you’ll have a temporary difference in year 1 of $320,000 which will be reduced each year until it’s $0 in year 5.
So in year 1 you credit deferred tax and debit tax liability by $64,000.
Then each year for 4 years you debit deferred tax and credit tax liability by $16,000.
Like this:Year 1 Dr DT 64,000.00
Cr Tax 64,000.00Year 2 Dr Tax 16,000.00
Cr DT 16,000.00Year 3 Dr Tax 16,000.00
Cr DT 16,000.00Year 4 Dr Tax 16,000.00
Cr DT 16,000.00Year 5 Dr Tax 16,000.00
Cr DT 16,000.00Have I got this correct?
Looks good to me but it’s unlikely that you’ll get a deferred tax question with just a single asset involved.
What then happens is that we calculate the deferred tax liability / provision to carry forward and the balancing figure in the deferred tax account is then transferred to the current tax account
Ok?
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