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Please help? Accounting theory for this tax question?

Smelvin corp. pays federal income tax @ the rate of 34%. The corp. reports $100,000 depreciation expense on its financial statements & deducts $140,000 depreciation expense on its tax return.

How will Smelivn account for the difference between its federal tax liability & its book tax expense on its financial statements?

Are there suitable examples & rationales for each?

The increased depreciation expense for tax purposes means that Smelvin will be paying less tax this year than had they used the book depreciation. This creates a "deferred tax liability".

Accounting for this liability in the US is governed by SFAS 109. Basically, you will create a liability of $13,600 (34% of the depreciation difference.)

Credit liability account for federal tax liability
Debit expenses for book tax expense

As the debit for book tax will be greater than the credit for your actual accrual, your balancing entry is a credit to deferred tax liability.

There would need to be a special account to carry the difference of $40,000.

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