CHAPTER 19 10. At the beginning of 2018, Whitney Co. purchased an asset for $1,8

ID: 2561184 • Letter: C

Question

CHAPTER 19 10. At the beginning of 2018, Whitney Co. purchased an asset for $1,800,000 with an estimated useful life of 5 years and an estimated salvage value of $150,000. 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 whitney C s tax rate is 4 % for 2018 and all future years a) At the end of 2018, what are the book basis and the tax basis of the asset? b) At the end of 2018, which deferred tax account and balance is reported on Whitney's balance sheet?

Explanation / Answer

Cost of depreciable asset=$1,800,000

Estimated useful life=5 years

Estimated salvage value=$150,000

Depreciation as per Straight line method=(1800000-150000)/5= $ 330,000

At the end of 2018 , book basis of asset=(1800000-330000)= $1,470,000

Depreciation as per double declining balance method:

Straight line depreciation rate=1/5=0.2=20%

double declining balance method depreciation =2*(Straight line depreciation rate)*(Book value at the beginning of the year)=2*0.2*1800000=$720,000

At the end of 2018 , Tax basis of asset=(1800000-720000)= $1,080,000

.b) Calculation of deferred tax

Tax rate=40%

Depreciation tax shield for straight line method=330000*0.4=$132,000

Depreciation tax shield for Double declining balance method=720,000*0.4=$288,000

Difference in tax =(288000-132000)=$156,000

Tax actually paid will be lower than the amount in financial statement by $156,000

This amount will be reflected as “Deferred Tax Liability”in the Balance sheet. This amount is deferred and needed to be paid in future.

Deferred Tax Liability in the balance sheet at the end of 2018=$156,000

At the end of 2018 book basis of asset

$1,470,000

At the end of 2018 tax basis of asset

$1,080,000

At the end of 2018 Deferred tax liability

$156,000