On January 1, 2014, Deng Company purchased an asset for $100,000. For financial

Question

On January 1, 2014, Deng Company purchased an asset for $100,000. For financial accounting
purposes, the asset will be depreciated on a straight-line basis over five years with no residual
value at the end of that time. For tax purposes, the asset will be depreciated as follows: 2014,
$40,000; 2015, $30,000; 2016, $20,000; 2017, $10,000; and 2018, $0. Assume that the company is subject to a 40% tax rate.
Required
1. What is the amount of deferred tax at December 31, 2014?
2. Does the deferred tax represent an asset or a liability?
3. What is the amount of deferred tax at December 31, 2018?

Explanation / Answer

First lets draw the chart

1) since under the book value the income will be more reported by $20,000and hence more tax hence the deferred tax liablitiy will be $20,000 * 40% = $8,000

2) Deferred tax will be a liability

3) there will be no deferred tax at December 31,2018

Year Tax Depreciation Book depreciation Difference 2014 40,000 20,000 $20,000 2015 30,000 20,000 $10,000 2016 20,000 20,000 $0 2017 10,000 20,000 ($10,000) 2018 $0 20,000 ($20,000) $100,000 $100,000 $0

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