SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2013. SNZ plans to depreciate the asset straight-line over 20 years with no salvage value. For tax purposes these assets are to be depreciated using a capital cost allowance rate of 20%. The half-year rule applies. SNZ pays tax at a rate of 25%. What is the amount of the Deferred Tax Asset or Liability on December 31, 2014?

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Quizplus · Accepted Answer

The book depreciation is $1,500 per year ($30,000/20 years). For tax, the CCA for 2013 is $3,000 (half-year rule: $30,000 * 20% * 0.5) and for 2014 is $5,400 ($27,000 * 20%). The tax base is lower than the book value, creating a deferred tax liability. The difference in depreciation for 2013 and 2014 is $5,400 - $3,000 = $2,400. The tax effect is $2,400 * 25% = $600. The deferred tax liability for 2014 is $1,350 ($600 from 2013 + $750 from 2014).

SNZ Inc Purchased Machinery and Equipment in the Amount of $30,000