Determining the tax rate:
There is a difference between what the books (GAAP) uses for numbers and what the tax records use as a base.
The difference between these two numbers, call the temporary difference, is then multiplied by the tax rate to get the
Future tax Asset or Liability.
In this case, the books are saying that Property, Plant and Equipment is $950,000 while the tax records have them
valued at $940,000 giving a temporary difference of $10,000.
So if the Temporary Difference x tax rate = Future tax asset or Liability then 10,000 x rate = $3,000 (the $3000 was
given in the question) Therefore the tax rate must be 3000/10,000 = 30%.
Analysis of the differences:
1) Rent: $50,000 is expensed for tax purposes now but will be expensed for book purposes later. Because of this,
for the year in question, 2012, the extra rent is DEDUCTED from accounting income to calculate taxable income.
Then because it is deducted from taxable income, income tax payable will be lower than accounting income tax.
And if we pay less tax now, then eventually, because this only a timing difference, we will have to pay more tax later.
Therefore having to pay more later leads to a LIABILITY.
(You will see a pattern with timing differences. If they start off being deductions they create tax liabilities and if they
start off being added to accounting income, they create tax assets. )
Side note: This liability, 50,000 x 30%, is it a current liability or long-term? It depends on the underlying item, in this
case, the rent that caused it . So the 2013 portion would be current and the 2014 portion would be long-term.