Snifful Industries has a depreciable asset that is estimated for accounting purposes to have a useful life of 7 years.For taxation purposes the useful life is 3 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 $210 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 2,3 and 4?

Question

Quizplus · Accepted Answer

To calculate the deferred tax liability, we need to find the difference in depreciation expenses between the two methods.

For the accounting method: 
Depreciation expense per year = Cost / Useful life = $210,000 / 7 = $30,000 per year

For the tax method: 
Depreciation expense per year = Cost / Useful life = $210,000 / 3 = $70,000 per year

So the difference each year is: 
Year 1: $40,000 
Year 2: $40,000 
Year 3: $40,000 
Year 4: $0

To calculate the deferred tax liability, we need to multiply these differences by the tax rate of 30%.

At the end of year 2: 
Deferred tax liability = $40,000 * 30% = $12,000

At the end of year 3: 
Deferred tax liability = ($40,000 * 2) * 30% = $24,000

At the end of year 4: 
Deferred tax liability = $0 (the difference between depreciation expenses is $0 in year 4)

Snifful Industries Has a Depreciable Asset That Is Estimated for Accounting