Question

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 30 - 33 Brown Co. purchased a piece of equipment last year for $900,000. Management estimates that the equipment will have a useful life of six years and no salvage value. The depreciation expense recorded for tax purposes is computed using the double-declining balance method of depreciation. The company uses the straight-line method of depreciation for reporting purposes. 30. Calculate the amount of depreciation expense for reporting purposes for this year (Year 2). 31. Calculate the amount of depreciation expense for tax purposes for this year (Year 2). 32. Will a deferred tax asset or a deferred tax liability be created (in Year 2) as a result of the depreciation recorded for tax and financial reporting purposes? (Circle your choice below): Deferred tax asset b. Deferred tax liability 33. Assuming that the company's tax rate is 40%, what dollar amount will be added to the deferred tax account in Year 2 as a result of the depreciation timing difference? a.

Answer 1

30 Depreciation for reporting purpose $150,000 31 Depreciation for taxation purpose $200,000 32 b.Deferred tax liability 33 Amount added to deferred tax liability $20,000 ($200,000-$150,000) * 40% Working notes: Book of accounts Book value Depreciation Accumulated depreciation Net book value Year 1 Year 2 $900,000 $900,000 $150,000 $150,000 $150,000 $300,000 $750,000 $600,000 Taxation Book value Depreciation rate = 1/6*2 Depreciation Accumulated depreciation Net book value Year 1 Year 2 $900,000 $600,000 33.33% 33.33% $300,000 $200,000 $300,000 $500,000 $600,000 $400,000 Difference in NBV Deferred tax liability balance -$150,000 $200,000 Deferred tax liability $60,000 $80,000 -$20,000