On Jan. 2, a company acquires an asset at net cost of $14M. For financial reporting purposes, the firm will depreciate the equipment over a 7 year life using straight-line depreciation and a zero salvage value; for tax reporting purposes, however, the firm will use 3 year accelerated depreciation. Given a tax rate of 35% and a first year accelerated depreciation factor of .333, by how much the compnay’s deferred tax acct increase in the first year of the equipment’s life? A. $931,700 B. $1,064,800 C. $1,730,300 D. $2,662,000 ------------------------ Answer is A. How did they get A?
$14M*0.333 = $2,662,000 $2,662,000*0.35 = $931,700 Hope this helps
can u please show a more detailed solution cause wen i tried …14m*.333 gives me 4.662 and moreover as per wat i ve read, dta is d diff btw the cv of d asset and the tax base…here cv is 12m(14m - 2m dep as per slm) and m nt sure abt how to calc tax base as .333 seems a bit confusing! please explain?
You are right my mistake. Trying to post and work at the same time. Apologies. $14M*0.333 = $4,662,000 $14M/7 = $2M $4,662,000 - $2,000,000 = $2,662,000 $2,662,000*0.35 = $931,700 Don’t quite understand the last post but here goes. They are only interest in the deffered tax in volved regarding depreciation. The difference between the taxable depreciation and applied depreciation. The assets carrying value has no implication here.
thanks fr that bt dont u think accelerated dep is calculated by = 2 (watever is the factor)*oc - accm dep/estimated life…above u have nt divided for calc dep by estimated life…
The question provided the acclerated depreciation factor. You would use the method you metioned if was not provided.
sgkhade07 Wrote: ------------------------------------------------------- > thanks fr that bt dont u think accelerated dep is > calculated by = 2 (watever is the factor)*oc - > accm dep/estimated life…above u have nt divided > for calc dep by estimated life… That’s where they try to trick you. You solely use .333 as the depreciation factor. The asset will be entirely depreciated in 3 years.
Thanks for the answers. This is how I did it, what’s incorrect here. ------------------Financial --------- Tax Return Depr------------2,000,000-------- 9,333,333 Tax(@35%)-----700,000--------- 3,266,666 DTA--------------2,566,666-------- zero ----------------------------------- Still don’t understand here. $4,662,000 is the RBV for the 1st year for tax purposes. Why would you subract the Deprication (under SL) from the RBV (under Accelerated)?
hey sgkhade07 - stop writing posts as if you are writing a text message. Write clearly what you want to say and you will get a clear response.
sgkhade07 Wrote: ------------------------------------------------------- > thanks fr that bt dont u think accelerated dep is > calculated by = 2 (watever is the factor)*oc - > accm dep/estimated life…above u have nt divided > for calc dep by estimated life… I agree with Thommo… it only takes a few seconds more to type out your thoughts articulately, and it does a lot of credit for how people perceive you. sgkhade07 Wrote: ------------------------------------------------------- > thanks fr that bt dont u think accelerated dep is > calculated by = 2 (watever is the factor)*oc - > accm dep/estimated life…above u have nt divided > for calc dep by estimated life… In response to this- you are trying to solve for the accelerated method, but the factor is given (.333 in the first year). You solve for the factor when they give you the type of accelerated method (double, 1.5, triple, etc.), so in this case it’s not necessary. Good luck!
Try this ------------------Financial --------- Tax Return Depr------------2,000,000-------- 4,662,000 Tax(@35%)-----700,000--------- 1,631,700 1,631,000 - 700,000 = DTA 931,700 Do not over complicate the calculation of Tax Return Depreciation. It is simply $14M*0.333 because the accelerated depreciation factor was provided in the question.
Jaffels - thanks much for the help! That was very helpful on your last post. Good Luck!