Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 21%, the excess tax depreciation results in a $3,318:
A) Deferred tax asset
B) Deferred tax liability
C) Permanent favorable book/tax difference
D) Permanent unfavorable book/tax difference

Question

Quizplus · Accepted Answer

The excess tax depreciation is the difference between the book depreciation and MACRS depreciation, which is $37,800 - $22,000 = $15,800. Since MACRS depreciation is greater than book depreciation, this results in a temporary favorable difference between book and tax depreciation, which means the company will have lower taxable income and therefore pay less taxes in the short term. However, since the excess depreciation will eventually be recaptured in the future, the company will have a higher tax liability in future years, creating a deferred tax liability. Therefore, the correct answer is B, deferred tax liability.

Uqua Inc Purchased a Depreciable Asset for $189,000