Question

Lelak Company was formed on January 1, year 2. Its machinery is being depreciated using the MACRS for income tax reporting and the straight-line method for financial statement reporting. Information concerning depreciation amounts under each method is as follows:

Year		MACRS		Straight-line method
Year 2		$600,000		$400,000
Year 3		$800,000		$500,000

Assuming that the enacted income tax rate is 30% for all affected years, the amount of deferred taxes charged to expense in Lelak’s year 3 income statement should be

$210,000

$150,000

$90,000

$30,000

Answer 1

Let us assume the cost of machinery is $ 20,00,000. (We can assume any other amount as cost and result will be same)

Year 2

Particulars Accounting Base Tax Base

Cost $20,00,000 $20,00,000

Less : Depreciation $4,00,000 $6,00,000

WDV : $16,00,000 $14,00,000

Thus Deferred Tax Asset = (Accounting base - Tax Base) * Tax Rate

= (16,00,000 - 14,00,000) * 30% = $60,000 recognised in Year 2.

Year 3

Particulars Accounting Base Tax Base

Opening WDV $16,00,000 $14,00,000

Less : Depreciation $5,00,000 $8,00,000

Closing WDV : $11,00,000 $6,00,000

Thus Deferred Tax Asset = (Accounting base - Tax Base) * Tax Rate

= (11,00,000 - 6,00,000) * 30% = $1,50,000

Already recognised in Year 2 = $60,000.

Thus required in Year 3 = $1,50,000 - $60,000 = $90,000.

Hence, the amount of deferred taxes charged to expense in Lelak’s year 3 income statement should be $90,000 (3rd Option).