Question

At the beginning of 2021, Pitman Co. purchased an asset for $1,800,000 with an estimated useful life of 5 years and an estimated salvage value of $150,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.’s tax rate is 20% for 2021 and all future years.

At the end of 2021, which of the following deferred tax accounts and balances is reported on Pitman’s balance sheet?

Answer 1

Cost of Assel = $ 18,00,000 Useful Life of Assef - 5 years Salvage Value - $ 150,000 Depreciation as per Straight Live Method - - Cost of Asset - Sohage Values No. of life (in yours) 1,800,000 - 150,00 $ 3,30,000 Value of Depreciation) Asset (Post = = $1,800,000 - $3,30,000 $1,470,000/-

Depreciation as per double deckning Mathod Rate of Depreciation (%) = 1 = 20% Depreciation as per Double declining Method = 2x x Cost of Asset Depreciation Rate = 2 x 20 x 1,800,000 = $720,000 Value of Asset (Post Depreciation) = $ 1,800,000 - $720,000 = $1,080,000/-

Deferred Tas Computation Tax Rate - 20% Sepreciation Tax Shield: ut live Method - $3, 30,000 x 20 = $66,070 - Double Declining method = $720,000 x 20 = $144,050 Difference in Tax = $144,000 - $66,000 $78,000 Increase in the amount of depreciation led to decrease in the amount of Tax in current year but need to pay in future , Hence, deferred Tax Liability need to be created.

At the end of 2021, Book Value of Asset as Book basis per = $1,470,000 Value of Asset as per $ 1,080,000 Tax basis Deferred Fox Liability = $78000
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