What is the impact on deferred tax asset and deferred tax liability if a company records...

What is the impact on deferred tax asset and deferred tax liability if a company records accelerated depreciation for tax purposes and straight-line depreciation for book purposes?

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Expert Solution

When a company is using an accelerated depreciation method the tax calculated will reduce in comparison to the tax calculated using straight line depreciation method. This will happen for few initial years. after few years the accelerated depreciation value will be less than the straight line depreciation value causing the tax to be higher in accelerated depreciation method.

Hence in initial years, when accelerated depreciation is more than straight line depreciation, the actual tax paid will be less than the actual tax calculated on books, this will cause the increase of deferred tax liability for tax purposes, while deferred tax asset will increase for book purpose.

After few years, when accelerated depreciation is less than straight line depreciation, the actual tax paid will be more than the actual tax calculated on books, this will cause the decrease of deferred tax liability for tax purposes, while deferred tax asset will also decrease for book purpose.

jeff jeffy answered 3 months ago

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