{"id":213123,"date":"2025-05-09T12:25:54","date_gmt":"2025-05-09T12:25:54","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=213123"},"modified":"2025-05-09T12:25:56","modified_gmt":"2025-05-09T12:25:56","slug":"the-original-cost-of-an-asset-is-600000-3","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/09\/the-original-cost-of-an-asset-is-600000-3\/","title":{"rendered":"The original cost of an asset is $600,000."},"content":{"rendered":"\n

The original cost of an asset is $600,000. The asset has a 3-year life and no salvage value expected. For tax purposes, the asset is depreciated using an accelerated depreciation method with tax return depreciation of $300,000 in year 1, $200,000 in year 2, and $100,000 in year 3. The firm adopts straight-line method of depreciation in its income statements. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is $500,000 each year. The firm\u2019s tax rate is 40%. Calculate the firm\u2019s income tax expense, and deferred tax liability for each year of the asset\u2019s life.<\/p>\n\n\n\n

What do you understand by the term \u2018Deferred Tax\u2019? Gerald Ltd. revalued a property from a carrying value of $4 Million to its fair value of $6.2 million during the reporting period. The property cost $6.5 Million, and its tax base is $3.5 Million. The tax rate is 30%. Explain the deferred tax implications.<\/p>\n\n\n\n

The Correct Answer is Explanation is :<\/mark><\/strong><\/p>\n\n\n\n

\u2705 Part 1: Calculating Income Tax Expense and Deferred Tax Liability<\/strong><\/h3>\n\n\n\n

Asset Cost<\/strong>: \\$600,000
Life<\/strong>: 3 years
No salvage value<\/strong>
Straight-Line Depreciation (Income Statement)<\/strong>: \\$600,000 \u00f7 3 = \\$200,000\/year<\/strong>
Accelerated Tax Depreciation<\/strong>:<\/p>\n\n\n\n

    \n
  • Year 1: \\$300,000<\/li>\n\n\n\n
  • Year 2: \\$200,000<\/li>\n\n\n\n
  • Year 3: \\$100,000<\/li>\n<\/ul>\n\n\n\n

    EBITDA<\/strong>: \\$500,000\/year
    Tax Rate<\/strong>: 40%<\/p>\n\n\n\n

    \n\n\n\n

    Year-by-Year Tax Calculation<\/strong><\/h3>\n\n\n\n

    Year 1<\/strong>:<\/h4>\n\n\n\n
      \n
    • Accounting Depreciation = \\$200,000<\/li>\n\n\n\n
    • Tax Depreciation = \\$300,000<\/li>\n\n\n\n
    • EBIT = \\$500,000 \u2212 \\$200,000 = \\$300,000<\/strong><\/li>\n\n\n\n
    • Taxable Income = \\$500,000 \u2212 \\$300,000 = \\$200,000<\/strong><\/li>\n\n\n\n
    • Tax Expense (Book) = \\$300,000 \u00d7 40% = \\$120,000<\/strong><\/li>\n\n\n\n
    • Tax Payable (IRS) = \\$200,000 \u00d7 40% = \\$80,000<\/strong><\/li>\n\n\n\n
    • Deferred Tax Liability (DTL)<\/strong> = \\$120,000 \u2212 \\$80,000 = \\$40,000<\/strong><\/li>\n<\/ul>\n\n\n\n

      Year 2<\/strong>:<\/h4>\n\n\n\n
        \n
      • Accounting Depreciation = \\$200,000<\/li>\n\n\n\n
      • Tax Depreciation = \\$200,000<\/li>\n\n\n\n
      • EBIT = \\$500,000 \u2212 \\$200,000 = \\$300,000<\/strong><\/li>\n\n\n\n
      • Taxable Income = \\$500,000 \u2212 \\$200,000 = \\$300,000<\/strong><\/li>\n\n\n\n
      • Tax Expense = \\$300,000 \u00d7 40% = \\$120,000<\/strong><\/li>\n\n\n\n
      • Tax Payable = \\$300,000 \u00d7 40% = \\$120,000<\/strong><\/li>\n\n\n\n
      • Deferred Tax Liability<\/strong> = \\$0<\/li>\n\n\n\n
      • Cumulative DTL remains \\$40,000<\/strong><\/li>\n<\/ul>\n\n\n\n

        Year 3<\/strong>:<\/h4>\n\n\n\n
          \n
        • Accounting Depreciation = \\$200,000<\/li>\n\n\n\n
        • Tax Depreciation = \\$100,000<\/li>\n\n\n\n
        • EBIT = \\$500,000 \u2212 \\$200,000 = \\$300,000<\/strong><\/li>\n\n\n\n
        • Taxable Income = \\$500,000 \u2212 \\$100,000 = \\$400,000<\/strong><\/li>\n\n\n\n
        • Tax Expense = \\$300,000 \u00d7 40% = \\$120,000<\/strong><\/li>\n\n\n\n
        • Tax Payable = \\$400,000 \u00d7 40% = \\$160,000<\/strong><\/li>\n\n\n\n
        • Deferred Tax Liability Reversed<\/strong> = \\$120,000 \u2212 \\$160,000 = \u2212\\$40,000<\/strong><\/li>\n\n\n\n
        • Final DTL = \\$0<\/strong><\/li>\n<\/ul>\n\n\n\n
          \n\n\n\n

          \u2705 Part 2: Understanding Deferred Tax & Revaluation Implication<\/strong><\/h3>\n\n\n\n

          Deferred tax<\/strong> refers to tax effects that are recognized in accounting but not yet realized in tax filings. It arises from temporary differences<\/strong> between the carrying amount of assets or liabilities in financial statements and their tax base. A Deferred Tax Liability (DTL)<\/strong> indicates taxes payable in future periods due to temporary taxable differences. Conversely, a Deferred Tax Asset (DTA)<\/strong> arises when tax is overpaid or carried forward.<\/p>\n\n\n\n

          Gerald Ltd. Property Revaluation<\/strong><\/h3>\n\n\n\n
            \n
          • Carrying Value: \\$4M<\/li>\n\n\n\n
          • Revalued Fair Value: \\$6.2M<\/li>\n\n\n\n
          • Tax Base: \\$3.5M<\/li>\n\n\n\n
          • Revaluation Surplus = \\$6.2M \u2212 \\$4M = \\$2.2M (recognized in OCI)<\/li>\n\n\n\n
          • Temporary Difference = \\$6.2M \u2212 \\$3.5M = \\$2.7M<\/strong><\/li>\n\n\n\n
          • Tax Rate: 30%<\/li>\n\n\n\n
          • Deferred Tax Liability<\/strong> = 30% \u00d7 \\$2.7M = \\$810,000<\/strong><\/li>\n<\/ul>\n\n\n\n

            This DTL is recognized in Other Comprehensive Income (OCI)<\/strong> alongside the revaluation surplus, as it relates to items not affecting profit or loss immediately.<\/p>\n","protected":false},"excerpt":{"rendered":"

            The original cost of an asset is $600,000. The asset has a 3-year life and no salvage value expected. For tax purposes, the asset is depreciated using an accelerated depreciation method with tax return depreciation of $300,000 in year 1, $200,000 in year 2, and $100,000 in year 3. The firm adopts straight-line method of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-213123","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/213123","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=213123"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/213123\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=213123"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=213123"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=213123"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}