Question

Calculate the deferred tax asset at 31 December 20X1 based on the following:

$10,000 asset acquired 01 January 20X1

Asset has zero estimated salvage value

Useful life of five years for both GAAP and tax depreciation

GAAP depreciation – straight-line method

Tax depreciation – double declining balance method (i.e. 40% of the asset’s depreciable base is depreciated in year one)

Tax rate of 30%

Select one:

a. $2,000

b. $600

c. NA – should be a deferred tax liability instead of a deferred tax asset

d. $300

e. $1,200

Answer 1

C.NA - should be a deferred tax liability instead of a deferred tax asset.

here,

the depreciation amount under GAAP will be $10,000 / 5 years =>$2,000.

the depreciation amount under tax will be $10,000*40% =>$4,000.

so the income under tax accounting will be less than income under GAAP.

this will result in lower tax being paid now.

SInce the tax paid is lower a deferred tax liability will arise.

amount of deferred tax liability will be ($4,000 - $2000) * 30% =>$600.