On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A disclosure note reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report:

Question

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The $6 million of tax depreciation in excess of depreciation in the income statement creates a temporary difference that will result in future taxable amounts when the depreciation on the tax return is less than the depreciation on the income statement in future years. This leads to a deferred tax liability, not an asset. Since the difference will reverse over more than one year, it is classified as a noncurrent deferred tax liability.

On Its Tax Return at the End of the Current