Assume that a corporation in the 25 percent tax bracket purchases a piece of equipment for $67,000 with a ten-year useful life and no estimated salvage value.The corporation uses straight-line depreciation for book purposes and double-declining-balance depreciation for tax purposes.The first-year temporary difference,using income tax allocation procedures,would result in a

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For book purposes, the corporation will depreciate the equipment using straight-line depreciation method:

Depreciation Expense = Cost of Equipment / Useful Life = $67,000 / 10 = $6,700 per year

For tax purposes, the corporation will use double-declining-balance (DDB) method, which is an accelerated depreciation method. The depreciation rate is double the straight-line rate, or 2/10 = 20%.

Year 1 depreciation using DDB method = Beginning Book Value x Depreciation Rate = $67,000 x 20% = $13,400

However, since the tax depreciation exceeds book depreciation, there will be a temporary difference that creates deferred tax liability (DTL).

The deferred tax liability for year 1 is calculated as follows:

DTL = (Tax Depreciation – Book Depreciation) x Tax Rate
    = ($13,400 – $6,700) x 25%
    = $1,675

Therefore, the corporation will record a credit to deferred income taxes of $1,675 in year 1.

Assume That a Corporation in the 25 Percent Tax Bracket