Question

A company purchases an asset with a 5-year depreciable life for $75,00 with no expected salvage value.

The company uses straight line depreciation for financial statements and uses double-declining for tax accounting. Assume a tax rate of 34%.

What is the value of the company's deferred tax account at the end of the third year?

Enter your answer as a whole number with no commas and no dollar sign.

Answer 1

Computation of Depreciation under Straight Line Method

Depreciation = (Cost - Salvage Value) / Number of years of life

Depreciation = (7500 - 0) / 5

Depreciation = $1,500 per year

Computation of Depreciation under Double Declining Method

Rate of Depreciation = 2 * (100 / Number of years of life)

Rate of Depreciation = 2 * (100 / 5)

Rate of Depreciation = 40%

Depreciation Chart of Asset till third year

Year	Asset Value at the beginning	Depreciation
1	$7,500	$3,000
2	$4,500	$1,800
3	$2,700	$1,080

Computation of Deferred Tax Liability

Year	SLM Depreciation (A)	DDB Depreciation (B)	Difference (B - A)	Tax on Difference @ 34%
1	1500	3000	1500	510
2	1500	1800	300	102
3	1500	1080	(420)	(142.80)
Total				469.20

At the end of the year 3, the balance in the Deferred Tax account is 469