Question

Company A is using the S/L depreciation method for financial statement purposes. This year, the annual depreciation expense is 300,000. For tax purposes, they are using the MACRS accelerated depreciation method, and the annual depreciation expense is 400,000. The difference creates a:

A N/A, using different depreciation methods for book and tax purposes will not create a deferred tax asset or liability

B Deferred tax asset

C Deferred tax liability

Answer 1

Answer: If you are using the different method of charging depreciation, it creates eith deferred tax liability or deferred tax laibiliy. If you are claiming more depreciation under tax laws, which means you are paying less taxes (due to more depreciation claims) in current year and you have to pay those differential taxes in future years creating a deferred tax liability.

In our question, we are claiming 4,00,000 depreciation in tax laws and 3,00,000 depreciation in financial statement. Since, we are claiming higher depreciation under tax laws, it would create the deferred tax liability.

Hence Answer (C) is correct.