Why does an asset write-up create a deferred tax liability? Why does an asset write-down create a deferred tax asset?
Question
Why does an asset write-up create a deferred tax liability?
Why does an asset write-down create a deferred tax asset?
Solution
Sure, I can explain that.
- Asset Write-Up Creating a Deferred Tax Liability:
When a company writes up an asset, it increases the book value of the asset on its balance sheet. However, for tax purposes, the tax base (the value of the asset according to tax laws) of the asset remains the same. This creates a temporary difference between the book value and the tax base of the asset.
The company will have to pay tax on this temporary difference in the future when the asset is sold or depreciated. This future tax obligation is recorded as a deferred tax liability on the company's balance sheet.
- Asset Write-Down Creating a Deferred Tax Asset:
Conversely, when a company writes down an asset, it decreases the book value of the asset on its balance sheet. Again, the tax base of the asset remains the same, creating a temporary difference.
In this case, the company will have a future tax benefit, because it will pay less tax on the lower book value of the asset when it is sold or depreciated. This future tax benefit is recorded as a deferred tax asset on the company's balance sheet.
In both cases, the deferred tax liability or asset arises because of the difference between the book value and the tax base of the asset, and the expectation of future tax payments or benefits.
Similar Questions
Which of the following is contra-asset account?Multiple choice question.Deferred RevenueDepreciation ExpenseAllowance for Doubtful AccountsCommon Stock
Which of the following is contra-asset account?Multiple choice question.Depreciation ExpenseAllowance for Doubtful AccountsDeferred RevenueCommon Stock
It is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
when we are selling asset , is it capital receipt as we are getting money or exp as asset is decreasing
Which of the following is an example of a liability?Accumulated depreciationRevenue received in advanceAllowance for doubtful debtsPrepayments
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.