SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2019. 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 temporary difference between straight line depreciation and capital cost allowance on December 31, 2020?

Question

Quizplus · Accepted Answer

The temporary difference is calculated by comparing the book depreciation and the tax depreciation (capital cost allowance) at the end of 2020. Straight-line depreciation for book purposes is $30,000 / 20 years = $1,500 per year. For tax purposes, due to the half-year rule, the first year's depreciation is 10% of $30,000 = $3,000. The remaining balance of $27,000 is depreciated at 20% for the second year, which is $5,400. By the end of 2020, the total book depreciation is $3,000 (2 years * $1,500), and the total tax depreciation is $8,400 ($3,000 + $5,400). The temporary difference is $8,400 - $3,000 = $5,400.

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