Jensen Ltd has a depreciable asset that cost $300 000 at the beginning of Year 1.It has a useful life of 5 years and zero residual value.The company depreciates the asset on a straight-line basis for accounting purposes but for tax purposes claims a depreciation allowance calculated on the reducing-balance basis at a rate of 25%.The company tax rate is 30%.At the end of year 2,in respect of this asset,Jensen Ltd will show:

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The carrying amount of the asset at the end of Year 2 will be $240 000 ($300 000 - $60 000 depreciation for 2 years). The tax base will be $225 000 (cost of $300 000 - total tax depreciation of $75 000). The difference of $15 000 will result in a temporary difference between accounting and tax values of the asset.

The deferred tax liability will be the tax rate (30%) multiplied by the temporary difference ($15 000) giving $4 500 for the end of Year 2. However, at the end of Year 1, the deferred tax liability was $3 375 and this amount needs to be adjusted for the current year's increase resulting in a deferred tax liability of $3 375 + $1 125 = $4 500 at the end of Year 2.

Jensen Ltd Has a Depreciable Asset That Cost $300 000