Raging Dragons Ltd has a depreciable asset that is estimated for accounting purposes to have a useful life of 15 years.For taxation purposes the useful life is 10 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 $150 000.What adjustment will be required to the deferred tax liability account in years 10 and 11?

Question

Quizplus · Accepted Answer

Since the asset has a different useful life for tax purposes and accounting purposes, there will be temporary differences in the amount of depreciation expense recognized for accounting and tax purposes in each year. This will create a deferred tax liability (or asset) on the balance sheet.

Using the straight-line method, the annual depreciation expense for both accounting and tax purposes would be $10,000 ($150,000/15 years).

In the first 9 years, the total depreciation expense recognized for accounting purposes would be $90,000, and for tax purposes, it would also be $90,000.

However, in year 10, the accumulated depreciation recognized for accounting purposes would be $100,000 ($10,000 x 10 years), whereas for tax purposes, it would only be $90,000 ($10,000 x 9 years). This creates a temporary difference of $10,000, which will result in a deferred tax liability.

The tax rate is 30%, so the adjustment to the deferred tax liability account at the end of year 10 would be:

Deferred tax liability = Temporary difference x Tax rate
= $10,000 x 30%
= $3,000

Therefore, at the end of year 10, the deferred tax liability account would increase by $3,000.

In year 11, there would be another $10,000 of depreciation recognized for accounting purposes, bringing the accumulated depreciation to $110,000. However, for tax purposes, the accumulated depreciation would only be $100,000 ($10,000 x 10 years). This creates a temporary difference of $10,000, but since the deferred tax liability account already accounts for $3,000 of this difference, the adjustment in year 11 would only be for the remaining $7,000:

Deferred tax liability = (Temporary difference - Previous adjustment) x Tax rate
= ($10,000 - $3,000) x 30%
= $2,100

Therefore, the adjustment to the deferred tax liability account in year 11 would be a decrease of $2,100.

The correct answer is C: End of year 10 $1500; year 11 $(3000).

Raging Dragons Ltd Has a Depreciable Asset That Is Estimated