By NEAS - 8/1/2018 8:49:49 PM
FA Module 13 Depreciation and deferred taxes practice exam questions
(The attached PDF file has better formatting.)
A firm uses straight line depreciation for fixed assets with an estimated useful life of 12 years for its financial statements and 8 years for taxable income.
● Equipment is bought for 500 on December 31, 20X0.
● The firm’s corporate income tax payments are 65 in 20X1, 69 in 20X2, and 57 in 20X3.
● In 20X1 and 20X2, the corporate tax rate is expected to be 19% for all years.
● On January 1, 20X3, legislation is enacted that reduces the tax rate to 10% for 20X4 and later years.
Depreciation on the equipment causes the only deferred tax assets or liabilities for the firm.
Question 13.1: Carrying value
What is the carrying value of the equipment on December 31, 20X1?
Answer 13.1: 500 – 500 / 12 = 458.33
(carrying value = purchase price – financial depreciation)
Question 13.2: Tax basis
What is the tax basis of the equipment on December 31, 20X1?
Answer 13.2: 500 – 500 / 8 = 437.50
(tax basis = purchase price – tax depreciation)
Question 13.3: Deferred tax asset or liability
What is the deferred tax asset (liability) at December 31, 20X1?
Answer 13.3: (437.50 – 458.33) × 19% = (3.96)
(deferred tax asset = (tax basis – carrying value) × tax rate)
Question 13.4: Tax expense
What is the tax expense in 20X1?
Answer 13.4: 65 – -3.96 = 68.96
(tax expense = taxes paid – Δ(deferred tax asset) + Δ(deferred tax liability) )
Question 13.5: Carrying value
What is the carrying value of the equipment on December 31, 20X2?
Answer 13.5: 500 – (2 × 500 / 12) = 416.67
(carrying value = purchase price – accumulated financial depreciation)
Question 13.6: Tax basis
What is the tax basis of the equipment on December 31, 20X2?
Answer 13.6: 500 – (2 × 500 / 8) = 375.00
(tax basis = purchase price – accumulated tax depreciation)
Question 13.7: Deferred tax asset or liability
What is the deferred tax asset (liability) at December 31, 20X2?
Answer 13.7: (375.00 – 416.67) × 19% = (7.92)
(deferred tax asset = (tax basis – carrying value) × tax rate)
Question 13.8: Tax expense
What is the tax expense in 20X2?
Answer 13.8: 69 – (-7.92 – -3.96) = 72.96
(tax expense = taxes paid – Δ(deferred tax asset) + Δ(deferred tax liability) )
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