Tissues Plc has a depreciable asset that is estimated for accounting purposes to have a useful life of 8 years.For taxation purposes the useful life is 5 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is £100 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 1,2 and 3?

Question

Quizplus · Accepted Answer

The deferred tax liability arises because the tax depreciation is faster than the accounting depreciation. At the end of year 1, the tax base is £80,000 and the accounting base is £87,500, creating a temporary difference of £7,500. At a 30% tax rate, this results in a deferred tax liability of £2,250. This pattern continues, increasing the deferred tax liability by £2,250 each year.

Tissues Plc Has a Depreciable Asset That Is Estimated for Accounting