Question

The Blueridge Corporation uses straight-line depreciation for financial reporting and the double-decline balance method for tax accounting. If the company acquired a fixed asset having an original cost of $40,000, an eight-year estimated useful life, and a 10% estimated salvage value, what will be the balance in the deferred income tax account attributable to this asset after two years, assuming Blueridge’s Tax rate is 35 percent.

Might it be appropriate for company A to depreciate an instrument over six years while BlueRidge Corporation appropriately chooses a depreciable life of eight years? Explain

Answer 1

Answer:
Depreciation under Straight Line Method
Cost of Asset = 40,000
Life of Asset = 8Years
Salvage Value = 4000
Depreciation per annum = Cost of Asset - Salvage Value/ Life of Asset
	=	(40000-4000)/8
	=	4500
Depreciation Under Double Declining Method
Percentage = 1/8 = 12.5%
Double Declining Method % = 2*12.5% = 25%
Depreciation for year 1 = 40000*25% = 10000
Depreciation for Year 2 = (40000-10000)*25% = 7500
Caculation of Deffered Tax asset or Liability
Particulars	1	2
As per Books	1575	1575
As per Tax	3500	2625
Deffered tax Liability	1925	1050
Total Defferd Tax liablity in Year 2 = 2975
b) Yes, Company can use Life of assets as it Thicks Fit