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 Deferred Tax Asset or Liability on December 31, 2019?

Question

Quizplus · Accepted Answer

Under the straight-line method, annual depreciation expense would be $1,500 ($30,000 ÷ 20 years). However, for tax purposes, the capital cost allowance rate of 20% is used, resulting in $6,000 of depreciation expense for the year ($30,000 x 20%).

Using the half-year rule, only one-half of the first year's depreciation expense can be claimed in the first year, so for tax purposes, the depreciation expense for 2019 would be $3,000.

This creates a temporary difference between the book value of the asset ($28,500, or $30,000 - $1,500) and tax value of the asset ($24,000, or $30,000 - $6,000).

Since the tax rate is 25%, the deferred tax liability would be 25% of the temporary difference, or $375 ($4,500 x 25%).

Therefore, the answer is B, a Deferred Tax Liability of $375.

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