Question

On January 1, 20X1, Local Bakery started operations. The company acquired a piece of equipment by issuing a note payable on that date. The note had a below market rate of interest.

Terms of the purchase of the equipment:

		Coupon rate	Market rate
Note payable	$200,000	1.30%	5.90%
Note term	6 years

The note is due in equal annual payments of principle and interest.

The company uses straight-line depreciation for book purposes.

Depreciation information on the equipment:

Useful life of the equipment, no salvage	10 years
20X1 Tax depreciation	$40,000
Tax rate	21%

What is the balance of deferred taxes payable-depreciation at December 31, 20X1?

Answer 1

Calculation of fair value of equipment i.e. present value of equipment

Year	Opening Balance	Interest @1.30%	Payment	Closing Balance	Discount factor @ 5.90%	Present value
20x1	$ 200,000	$ 2,600	$   -34,866	$ 167,734	0.9443	$            36,923
20x2	$ 167,734	$ 2,181	$   -34,866	$ 135,048	0.8917	$            39,102
20x3	$ 135,048	$ 1,756	$   -34,866	$ 101,937	0.8420	$            41,409
20x4	$ 101,937	$ 1,325	$   -34,866	$   68,396	0.7951	$            43,852
20x5	$   68,396	$     889	$   -34,866	$   34,419	0.7508	$            46,439
20x6	$   34,419	$     447	$   -34,866	$             -	0.7090	$            49,179
Total	$ 707,534	$ 9,198	$ -209,198	$ 507,534	4.9328	$         256,905

Fair value of equipment = $256,905

Calculation of Deferred Tax Payable on depreciation

Year	Depreciation as per Books of Accounts	Depreciation as per Taxation	Taxable Temproary difference	Deferred tax Payable
	(A)	(B)	(C) = (B - A)	C*21%
December 31, 20x1	$           25,690	$         40,000	$            14,310	$      3,005