Compare the value of Asset as per Books of accounts and as per Income Tax Act
As per books Asset Value at year end 3 = Purchase Price less 3 yrs depreciation which is = $12,676*(5years – 3years / 5years) = $5070.4
As per Income tax act = $12676-35%-35%-30%= Nil
Comparing carrying amount with tax base, Carrying amt>Tax base so this is taxable temporary difference = Deferred Tax Liability of $5070.4*41%=$2078.86
Logic behind the same is, the price of asset signifies the future economic benefit that we will be getting by using it, so Carrying amount of $5070 signifies that we will be able to earn $5070 worth of benefit from it in future years while I won’t be getting any deduction on the amount as per income tax as the amount at year end 3 as per IT Act is zero i.e. no benefit will accrue after year end 3 as per income tax.
We do the same while we compute the value of Equity share Intrinsic value= present value of the benefits we are going to receive, the same goes for other assets.
So when assets carrying amount is more than its tax base deferred tax liability will be recorded.
Therefore whole $5070 amount will be taxable in future so you need to create a tax liability for the same.
Compare the value of Asset as per Books of accounts and as per Income Tax Act
As per books Asset Value at year end 3 = Purchase Price less 3 yrs depreciation which is = $12,676*(5years – 3years / 5years) = $5070.4
As per Income tax act = $12676-35%-35%-30%= Nil
Comparing carrying amount with tax base, Carrying amt>Tax base so this is taxable temporary difference = Deferred Tax Liability of $5070.4*41%=$2078.86
Logic behind the same is, the price of asset signifies the future economic benefit that we will be getting by using it, so Carrying amount of $5070 signifies that we will be able to earn $5070 worth of benefit from it in future years while I won’t be getting any deduction on the amount as per income tax as the amount at year end 3 as per IT Act is zero i.e. no benefit will accrue after year end 3 as per income tax.
We do the same while we compute the value of Equity share Intrinsic value= present value of the benefits we are going to receive, the same goes for other assets.
So when assets carrying amount is more than its tax base deferred tax liability will be recorded.
Therefore whole $5070 amount will be taxable in future so you need to create a tax liability for the same.