Raging Dragons Ltd has a depreciable asset that is estimated for accounting purposes to have a useful life of 15 years.For taxation purposes the useful life is 10 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 $150,000.What adjustment will be required to the deferred tax liability account in years 10 and 11?

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Quizplus · Accepted Answer

The difference in useful life between accounting and taxation purposes leads to a temporary difference in depreciation expense and therefore creates a deferred tax liability. 
The annual depreciation expense is $10,000 ($150,000/15 years). For tax purposes, the annual depreciation expense is higher at $15,000 ($150,000/10 years). The difference in depreciation between accounting and tax results in a deferred tax liability of $1,500 per year (($15,000-$10,000) x 30%). 
At the end of year 10, the cumulative deferred tax liability is $15,000 ($1,500 x 10). In year 11, the accounting depreciation expense is $10,000, while the tax depreciation expense is $0 ($150,000 fully depreciated). This results in a decrease in the deferred tax liability of $3,000 ($15,000-$12,000). Therefore, the adjustment required to the deferred tax liability account in years 10 and 11 is end of year 10: $1,500; year 11: $(3,000), which is option C.

Raging Dragons Ltd Has a Depreciable Asset That Is Estimated