Question

Question 3                                                                                                                                                         

A company has temporary difference only for tax-effect accounting purposes relating to the depreciation of a newly acquired machine. The machine is acquired on 1 July 2016 at a cost of $800,000. lts useful life is considered to be five years, after which time it is expected to have no residual value. For tax purposes it can be fully written off over two years. The tax rate is assumed to be 30 per cent.

1. Determine whether the depreciation of the machine will lead to a deferred tax asset or a deferred tax liability?
2. What would be the balance of the deferred tax asset or deferred tax liability as at 30 June 2019?   
3. What is the reasoning for recognising a deferred tax assets or a deferred tax liability?       

Answer 1

Solution a:

As higher depreciation will be charged in first 2 years for tax purpose, therefore depreciation of the machine will create taxable temporary differences and will give rise to deferred tax liability.

Solution b:

Book basis for machine on 30.06.2019 = $800,000 - ($800,000*3/5) = $320,000

Tax basis for machine on 30.06.2019 = 0

Deferred tax liability as at 30.06.2019 = $320,000 * 30% = $96,000

Solution c:

The deferred tax liability or deferred tax assets are recognized on temporary difference as per books and as per tax which reversible in nature in future to match the expenses and income in the same year.