Question

Eaton Ross Puppet Company acquired a new plastic molding machine at the beginning of the current year at a cost of $ 450 comma 000. The asset has a 6​-year useful life for financial reporting purposes and is depreciated on a​ straight-line basis with no residual value expected at the end of its useful life. The company uses the​ double-declining balance method on its income tax returns. The company is subject to a 35​% tax rate. Compute the deferred tax portion of the income tax expense for the first 2 years. Complete the table below to compute the​ straight-line book depreciation and​ double-declining tax depreciation method through year 2 to determine the​ book-tax difference.​ (Round your calculations to the nearest​ dollar.)

Answer 1

Solution:

Eaton Ross Puppet Company - Straight line method
Year	Asset Cost	Depreciable Cost	Depreciation Expense for the year (1/6 of depreciable cost)	Accumulated Depreciation	Ending Book Value
Purchase Date	$450,000.00
1		$450,000.00	$75,000.00	$75,000.00	$375,000.00
2		$450,000.00	$75,000.00	$150,000.00	$300,000.00
Total			$150,000.00

Depreciation rate - SLM = 1/6 = 16.666666%

Depreciation rate - DDB = 16.66666%*2 = 33.3333333%

Depreciation Schedule - Double Declining Balance Method
Date	Asset Cost	Book Value	Depreciation Rate (33.33333%)	Depreciation Expense for the year	Accumulated Depreciation	Ending Book Value
Purchase Date	$450,000
1		$450,000	33.33333%	$150,000	$150,000	$300,000
2		$300,000	33.33333%	$100,000	$250,000	$200,000

Computation of Deferred tax portion
Particulars	Year 1	Year 2
Depreciation - Straight line	$75,000.00	$75,000.00
Depreciation - DDB	$150,000.00	$100,000.00
Temporary Difference	$75,000.00	$25,000.00
Deferred tax (35%)	$26,250.00	$8,750.00