Assume that a corporation in the 25 percent tax bracket purchases a piece of equipment for $70,000 with a ten-year useful life and no estimated salvage value. The corporation uses straight-line depreciation for book purposes and double-declining-balance depreciation for tax purposes. The first-year temporary difference, using income tax allocation procedures, would result in a

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For book purposes, straight-line depreciation would be used, which would result in an annual depreciation of $7,000 ($70,000/10). For tax purposes, double-declining-balance depreciation would be used, which is calculated by multiplying the asset's net book value by twice the straight-line rate. In this case, the double-declining-balance rate would be 20% (twice the straight-line rate of 10%).

Year 1 book depreciation = $7,000 
Year 1 tax depreciation = $14,000 ($70,000 x 20%)

This results in a temporary difference of $7,000, with taxable income being lower than book income.

The deferred tax liability (DTL) is calculated by multiplying the temporary difference by the tax rate (25% in this case), resulting in a credit to Deferred Income Taxes of $1,750 (25% x $7,000 = $1,750). Therefore, the correct answer is C.

Assume That a Corporation in the 25 Percent Tax Bracket