On 1 January 20X2, Company A buys machinery for 90,000 and depreciates it using a diminishing balance method at 30% a year. For tax purposes, the machinery is depreciated at 25% per annum on a straight-line basis. The tax rate is 30%.
What is the amount of deferred tax assets the Company A should recognize as of 31 December 20X2 relating to the machinery if it is not probable that future taxable profit will allow any deferred tax assets to be recovered?
1,350
4,500
450
Zero
The difference between the depreciation methods for financial reporting (diminishing balance at 30%) and tax purposes (straight-line method at 25%) creates a temporary difference. To calculate the deferred tax asset, we first need to determine the difference in depreciation for the year.
For financial reporting: Depreciation = Cost * Rate = 90,000 * 30% = 27,000
For tax purposes: Straight-line depreciation = Cost / Useful life = 90,000 / 4 = 22,500
Temporary difference = Financial reporting depreciation - Tax depreciation = 27,000 - 22,500 = 4,500
Since it's not probable that future taxable profit will allow any deferred tax assets to be recovered, Company A should recognize a deferred tax asset of zero. Therefore, the correct answer is:
Zero.
