sorry fro all the questions on tax, i was going OK until i hit this subject.
purchase of $25,352 for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,38, If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3?
the answer for the above uses a tax rate of 31% - however they are only asking for the tax liability in yr 3 when the rate was 41%. why is this?
sorry i still keep getting tripped up… the answer is given below and as shown for years 1-3 the old tax rate applies… what i cant get my head around is that the tax asset/liability is established at the lower rate, yet when tax rates changes, we go back in time and change the DTL/DTA?
many thanks in advance
Straight-line depreciation = $25,352 / 5 = $5,070. Income (years 1, 2, and 3) using straight-line depreciation = $14,384 − $5,070 = $9,314.
Accelerated depreciation (years 1 and 2) = 0.35($25,352) = $8,873. Income (years 1 and 2) = $14,384 − $8,873 = $5,511.