Question

Prance, Inc., earns pretax book net income of $800,000 in 2018. Prance acquires a depreciable asset in 2019, and first-year tax depreciation exceeds book depreciation by $80,000.

In 2019, Prance reports $600,000 of pretax book net income, and the book depreciation exceeds tax depreciation that year by $20,000. Prance reports no other temporary or permanent book-tax differences. The pertinent U.S. tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%.

a. Enter below the 2019 end-of-year balance in Prance's deferred tax asset and deferred tax liability balance sheet accounts. If an amount is zero, enter "0".

a.	Deferred tax asset account balance	$
b.	Deferred tax liability account balance	$

b. The value to Prance of the accelerated tax deduction for depreciation, considering the time value of money. Prance earns an after-tax rate of return on capital of 8% is 0.9259.
$

Answer 1

a.) Calculation of deferred tax asset/liability :

First year tax depreciation of the asset exceeds Book depreciation by $80,000. This means, company is getting more expense deduction in the first year due to which it will be a Deferred Tax Liability for the company.

Therefore, Deferred Tax liability= $80000*21% (tax rate)= $16,800.

Next, in 2019 it is found that one of Book depreciation exceeds Tax depreciation by $20,000. So, the company will be getting less deduction in this case. Hence, it will be a Deferred tax asset for the company.

Deferred tax asset= $20000*21%=$4200

a	Deferred tax asset account balance	$4200
b	Deferred tax liability account balance	$16800

b. The value to Prance after accelerated tax deduction for depreciation shall be;

Net Income= $600000

Less: Tax@21%= ($126000)

Income = $474000

Add: Depreciation

tax deduction= $16800

Less:Tax deduction

not received= (4200)

Net income= $486600

Present value @8%= $486600*0.09259= $450543.