Question

The amount of income taxes due to the government for a period of time is rarely the amount reported on the income statement for that period as income tax expense. (c) List the steps in the annual computation of deferred tax liabilities and assets.

Short answer

An organization follows a proper wayto estimate its income tax expense and searches for measures and techniques to reduce the amount of total tax payable.

Step-by-step solution

Introduction

Three steps need to be followed when computing the value of deferred tax assets and deferred tax liabilities.

Steps used in the computation of deferred tax liabilities and assets

(1) Identification: It involves identifying or calculating the amount of temporary difference and account nature. The computation of loss carryback and carryforward is also determined if the organization incurs the net operating loss.

(2) Measurement: By using the effective tax rate, the amount of deferred tax asset or deferred tax liability is analyzed.

(3) Reduction of deferred tax asset: The deferred tax asset is reduced using the valuation account.