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