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 per cent 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

The deferred tax liability is the difference between the accounting depreciation and the tax depreciation. The accounting depreciation is $210,000 / 7 = $30,000 per year. The tax depreciation is $210,000 / 3 = $70,000 per year. The deferred tax liability is therefore $70,000 - $30,000 = $40,000 per year. At the end of year 2, the deferred tax liability is $40,000 * 2 = $80,000. At the end of year 3, the deferred tax liability is $40,000 * 3 = $120,000. At the end of year 4, the deferred tax liability is $40,000 * 4 = $160,000. However, the asset is fully depreciated for tax purposes at the end of year 3, so the deferred tax liability is reduced by $40,000 * 1 = $40,000, leaving a deferred tax liability of $120,000 at the end of year 4.

Snifful Industries Has a Depreciable Asset That Is Estimated for Accounting