You\'ve started working (either public accounting as an auditor or in corporate

Question

You've started working (either public accounting as an auditor or in corporate accounting position). It's year-end for your client (or the company you work for, I'll just use "client"). One of the senior level accounting people, Pat, is looking over things that affect net income. Pat pulls out a copy of the company's tax return which the tax department has prepared.

Pat points to the tax return and says, "Look, according to this official government form, our tax due for this past year is $510,000. But I look at the income statement and it says our income tax provision is $780,000. Why are we recognizing $270,000 more in tax expense than we owe the federal government?

Below draft your response to Pat, making it as clear and concise as possible. You don't have time to pull out any books, so don't include any quotes, just your own explanation of why the difference exists. Why is the income tax provision/expense more than what shows up on the tax return?

Explanation / Answer

The reason for such difference is that there exist certain differences between the Net Income shown in Income Statement and the incoome computed for Income tax purpose. These differences are mostly of depreciation expense, and these differences will reverse in coming future.

As a result, the net income under Income Statement may be more than what is computed for Income tax purposes. As per regulating Accounting Standards, due to such difference, income tax expense is recognised as "Deferred Tax expenses".

In the coming year, the income tax provision will be lower and income tax as per Return will be higher.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.