Question

Reddick Inc. purchased machinery on 1/1/2018 for $220,000. Assuming no salvage value, JV depreciated the asset straight line over a 4-year life for Book purposes, and 3-year life for Tax purposes.  Assume a zero residual for both book and tax.  

Required:  (a) What would be the balance in the Deferred Tax Liability account at the end of each year, assuming a 30% tax rate?  (b) What would be the journal entry if Reddick sold the asset for $30,000 at the beginning of year 5 – be sure to consider the effect on taxes?

Answer 1

	Answers:
(a)	Calculation of yearly depreciation under straight line method:
	Depreciation = (Acquisition value of the asset - Salvage value of the asset) / useful life of the asset
	Machinery value = 220000
	Salvage Value = 0
	Life of the asset as per book = 4 years
	Life of the asset as per tax = 3 years
	Depreciation as per book = 220000/4 = 55000
	Depreciation as per book = 220000/3 = 73333.33
	Deferred tax liability balance at the end of each year as below:
	Year	Depreciation as per book	Depreciation as per Tax	Depreciation difference	Tax rate	Deferred tax liability	Closing balance at the end of the each year
	2018	55000	73333.33	-18333.33	30%	-5500	-5500
	2019	55000	73333.33	-18333.33	30%	-5500	-11000
	2020	55000	73333.33	-18333.33	30%	-5500	-16500
	2021	55000		55000	30%	16500	0
		220000	220000
(b)	Journal entry for Asset sold on profit:
	Sl. No.	General Ledger		Debit	Credit
	1	Cash Account		30000
		Machinery Account			30000
		(Being asset sold)
	2	Machinery Account		30000
		Profit and Loss account			30000
		(Being profit on the sale of the asset)
	3	Income tax expenses		9000
		Income tax provision			9000
		(Being Tax on profit on sale of asset, 30000 X 30%)