ExpertHard1 markMultiple Choice
CPA · Question 18 · Area III: Select Transactions
Meridian Corp. purchased equipment on January 1, Year 1, for $600,000. The equipment has a 10-year useful life and $60,000 salvage value. Meridian uses straight-line depreciation for books and MACRS for tax purposes. MACRS depreciation for Year 1 is $120,000. The tax rate is 30%.<br/><br/>What is the deferred tax impact of this equipment in Year 1?
Meridian Corp. purchased equipment on January 1, Year 1, for $600,000. The equipment has a 10-year useful life and $60,000 salvage value. Meridian uses straight-line depreciation for books and MACRS for tax purposes. MACRS depreciation for Year 1 is $120,000. The tax rate is 30%.<br/><br/>What is the deferred tax impact of this equipment in Year 1?
Answer options:
A.
Deferred tax asset of $21,000
B.
Deferred tax liability of $21,000
C.
Deferred tax liability of $36,000
D.
No deferred tax impact
How to approach this question
Calculate book depreciation using straight-line method, compare to tax depreciation (MACRS), multiply the difference by the tax rate. Tax > Book creates DTL; Book > Tax creates DTA.
Full Answer
B.Deferred tax liability of $21,000✓ Correct
Deferred tax liability of $21,000
Under ASC 740, temporary differences between book and tax bases create deferred taxes. Book depreciation = ($600,000 - $60,000) ÷ 10 = $54,000. Tax depreciation = $120,000. The $66,000 difference (tax > book) creates a taxable temporary difference, resulting in a DTL of $66,000 × 30% = $19,800.
Common mistakes
Forgetting to subtract salvage value from book depreciation, using wrong tax rate, or confusing DTL vs DTA direction
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