Tissues Ltd has a depreciable asset that is estimated for accounting purposes to have a useful life of 8 years.For taxation purposes the useful life is 5 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is $100 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 1,2 and 3?

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Quizplus · Accepted Answer

The deferred tax liability arises because the tax depreciation is faster than the accounting depreciation. For accounting, the annual depreciation is $12,500 ($100,000/8 years), and for tax, it is $20,000 ($100,000/5 years). The difference creates a temporary difference of $7,500 per year. The deferred tax liability is 30% of the cumulative temporary difference: Year 1: $7,500 * 30% = $2,250; Year 2: $15,000 * 30% = $4,500; Year 3: $22,500 * 30% = $6,750.

Tissues Ltd Has a Depreciable Asset That Is Estimated for Accounting