Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Assuming a 21% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

Question

Quizplus · Accepted Answer

The effect of the sale on Noble's deferred tax accounts is a $11,232 decrease in deferred tax liabilities. This is calculated by finding the difference between the book and tax gain (or loss) on the sale and then applying the tax rate. The book value of the equipment at the time of sale is the original cost minus accumulated book depreciation ($310,000 - $93,840 = $216,160). The sale results in a book loss of $16,160 ($216,160 - $200,000). The tax basis of the equipment at the time of sale is the original cost minus accumulated tax depreciation ($310,000 - $147,327 = $162,673), resulting in a tax gain of $37,327 ($200,000 - $162,673). The difference between the book loss and tax gain is $53,487 ($37,327 - (-$16,160)). Applying the 21% tax rate to this difference results in a $11,232.27 decrease in deferred tax liabilities, rounded to $11,232.

Noble Inc Paid $310,000 for Equipment Three Years Ago