Took me a good 5min or so to figure/solve this one. Any tips?
A dance club purchased new sound equipment for $25,352. It will work for 5 years and has no salvage value. Their tax rate is 41%, and their annual revenues are constant at $14,384. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2 and 30% in Year 3. For purposes of this exercise ignore all expenses other than depreciation.
Assume that the tax rate changes for years 4 and 5 from 41% to 31%. What will be the deferred tax liability as of the end of year three?
Precisely. Better way to gauge your timing is to do a set of 60 questions, don’t even look at the timer (looks like you are using Qbank) which I know is hard because you can’t really turn it off, but don’t worry if you spend 4-5 minutes on a question.
After those 60 questions see how many minutes you took.
Also remember on the real test you can much more easily flip around/skip questions and come back, which also saves a lot of time. Like EddieChen said, a lot of the questions are really short. So hammer those out first.
My plan on test day is to go section by section in order, but on each section first tackle the short ones, then move to the longer ones, and then mark any ‘super long’ ones or ‘no idea’ ones for the end of the test. Pursue the highest marginal product of labor first!
This one isn’t too hard, once you figure out what information you actually need to solve the problem.
The problem is to find the value of the deferred tax liability at the end of year three. Now, the asset will be fully depreciated for tax purposes at the end of year three, but will have 40% of its depreciable value remaining on the books for reporting purposes (after depreciating 20% a year for three years). So the base value to use is 40% of the depreciable value, or 25,352*0.4 = 10,141.
They throw two tax rates at you here, but the only relevant one is the one that applies in the future, which is 31%. So 10,141*0.31=3,144, which is answer C.
Since you asked, it took me about 45 seconds. Deferred tax items was a weak area for me until I spent ages reviewing it, now it’s a strong area
