Question

At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated usefull life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2015 and all future years.

1) what are the book basis and the tax basis of the asset at the end of 2015?

2) how much and which deferred tax account is reported on Pitmant's balance sheet at the end of 2015?

Answer 1

1.Book basis & Tax Basis

(a) Book Basis

Depreciation on straight-line basis =Cost – salvage value / useful life

= ($ 1200000 - $ 100000) / 5 Years

=$ 220000 per year

Closing Balance = $ 1200000 - $ 220000 = $ 9,80,000

(b)Tax Basis

$ 220000 / $ 1100000 = 0.20

0.20 x 2 = 0.40

0.4 x $1,200,000 (cost) = $ 480,000

Closing Balance = $ 1200000 - $ 480000 = $ 7,20,000

2.At the end of 2015, which of the following deferred tax accounts and balances is reported on Pitman’s balance sheet ?

Book Basis                             $ 9,80,000

Tax basis                                $ 7,20,000

Difference                               $ 2,60,000

Double Declining Rate            0.40

Deferred tax liability             $ 1,04,000