Prance, Inc., earns pretax book net income of $800,000 in 2018. Prance acquires

Question

Prance, Inc., earns pretax book net income of $800,000 in 2018. Prance acquires a depreciable asset in 2019, and first-year tax depreciation exceeds book depreciation by $80,000.

In 2019, Prance reports $600,000 of pretax book net income, and the book depreciation exceeds tax depreciation that year by $20,000. Prance reports no other temporary or permanent book-tax differences. The pertinent U.S. tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%.

a. Enter below the 2019 end-of-year balance in Prance's deferred tax asset and deferred tax liability balance sheet accounts. If an amount is zero, enter "0".

b. The value to Prance of the accelerated tax deduction for depreciation, considering the time value of money. Prance earns an after-tax rate of return on capital of 8% is 0.9259.
$

a. Deferred tax asset account balance $ b. Deferred tax liability account balance $

Explanation / Answer

a.) Calculation of deferred tax asset/liability :

First year tax depreciation of the asset exceeds Book depreciation by $80,000. This means, company is getting more expense deduction in the first year due to which it will be a Deferred Tax Liability for the company.

Therefore, Deferred Tax liability= $80000*21% (tax rate)= $16,800.

Next, in 2019 it is found that one of Book depreciation exceeds Tax depreciation by $20,000. So, the company will be getting less deduction in this case. Hence, it will be a Deferred tax asset for the company.

Deferred tax asset= $20000*21%=$4200

b. The value to Prance after accelerated tax deduction for depreciation shall be;

Net Income= $600000

Less: Tax@21%= ($126000)

Income = $474000

Add: Depreciation

tax deduction= $16800

Less:Tax deduction

not received= (4200)

Net income= $486600

Present value @8%= $486600*0.09259= $450543.

a Deferred tax asset account balance $4200 b Deferred tax liability account balance $16800

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