During the year company B purchased production equipment for 7,000. For accounting purposes, depreciation of 1,000 has been expensed in the current period. For tax purposes, depreciation of 2,000 has been deducted in the current period and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated by using the equipment is taxable and any loss on disposal will be deductible for tax purposes. The tax rate is 25%.
What is the deferred tax that should be recognized in the current year in this scenario?
Deferred tax asset of 250
Deferred tax liability of 250
Deferred tax liability of 1,000
Deferred tax asset of 1,000
In this scenario, the difference between the accounting depreciation of 1,000 and the tax depreciation of 2,000 creates a temporary difference. Since the equipment's cost of 7,000 and the tax depreciation exceeds the accounting depreciation, it indicates a deferred tax liability because the higher tax depreciation results in a lower taxable income in the current period, which will lead to a lower tax expense in the future when the lower book value is written off.
The calculation for the deferred tax liability would be: deferred tax liability = (2,000 - 1,000) * 25% = 250.
Therefore, the deferred tax that should be recognized in the current year is: Deferred tax liability of 250.
