Question

Burke & Company, Inc., a calendar year C-corp that issues audited financial statements, acquired a major piece of production equipment this year at a total cost of $5,200,000. For financial statement purposes, the production equipment will have a salvage value of $200,000, and will depreciate on a straight-line basis over a 10 year life. On Burke & Company’s tax return, the asset will have no salvage value and will be depreciated using MACRS accelerated depreciation rates over 7 years. Assume no election is made to claim §179 or additional first year depreciation and that the applicable tax depreciation rate for 7 year assets in the first year of use is 0.1429. Further assume there are no other book tax differences in the current or any prior year.

a) Will the tax adjustment account on Burke & Company’s financial statement be a Deferred Tax Asset or Deferent Tax Liability?

b) Assuming the applicable federal tax rate is 21%, calculate the Deferred Tax Asset or Deferred Tax Liability balance as of the last day of the year?

Answer 1

Solution

A)

Calculation of Carrying Amount(CA) of production equipment as per Books

Particulars Amount($)

Opening value as per books   52,00,000

Less:-Depreciation (5,00,000)

(52,00,000-2,00,000/10)

Closing Value 47,00,000

Calculation of Tax Base(TB) of production equipment as per Federal Tax

Particulars Amount($)

Opening value as per books   52,00,000

Less:-Depreciation (7,43,080)

(52,00,000 X 0.1429)

Closing Value 44,56,920

The Tax Adjustment account on Burke & Company's Financial statemnent is deferred tax Liability as Carrying Amount is more than Tax Base.

Solution B)

Deferred tax Liability=(CA-TB) X Tax Rate

= (47,00,000-44,56,920) X 21%

= $ 51,046.80

Learning Point:- Deferred Tax =Carrying Amount as per books-Tax Base

=Temperary Difference X Rate of Tax

=Deffered Tax Assets/Deffered Tax Laibility

Deferred tax Liability is tax payable in future due to application of tax law on taxable temporary difference.Deferred tax Assets is expected tax recovery in future due to application of tax laws on deductible temporary difference.