Question 1

At year-end, Company Y has the following temporary differences:
- Tax depreciation exceeds book depreciation by $40,000.
- Warranty expense (book) exceeds warranty deductions (tax) by $10,000.
Tax rate is 25%. What is the net Deferred Tax Liability (DTL) or Asset (DTA)?

Accepted Answer

1. Identify Taxable vs Deductible differences. Tax Depr > Book Depr -> Future Taxable Income -> DTL. Book Exp > Tax Ded -> Future Deductible -> DTA. 2. Calculate tax effect. 3. Net them.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing DTA and DTL drivers.

At year-end, Company Y has the following temporary differences:<br/>- Tax depreciation exceeds book depreciation by $40,000.<br/>- Warranty expense (book) exceeds warranty deductions (tax) by $10,000.<br/>Tax rate is 25%. What is the net Deferred Tax Liability (DTL) or Asset (DTA)?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 4

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