The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2015 for $100 000 (accounting depreciation 10% straight line tax depreciation 20% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pamakari Limited at 30 June 2016 is:
A) debit Deferred tax asset $3000;
B) credit Deferred tax asset $3000;
C) debit Deferred tax liability $3000;
D) credit Deferred tax liability $3000.

Question

Quizplus · Accepted Answer

The difference in depreciation methods between accounting and tax purposes creates a temporary difference, leading to a deferred tax liability. Accounting depreciation is $10,000 (10% of $100,000), and tax depreciation is $20,000 (20% of $100,000), creating a temporary difference of $10,000. The tax effect of this difference is $3,000 (30% of $10,000), resulting in a credit to the deferred tax liability.

The Following Information Was Extracted from the Financial Records of Pamakari