Deferred Tax Impact of a Change in Depreciation Method
Refer to Practice 20 2. Assume that before 2008 the company used straight line depreciation for tax purposes while using double declining balance depreciation for book purposes. The change to straight line depreciation in 2008 is made for book purposes; the company continues to use straight line depreciation for tax purposes. The income tax rate is 40%. (1) Compute the amount of the deferred tax asset or liability that would be included in the December 31, 2007, balance sheet and (2) compute the amount of the deferred tax asset or liability that would be included in the December 31, 2008, balance sheet.
Practice 20 2
Change from Double Declining Balance to Straight Line Depreciation
On January 1, 2005, the company purchased equipment for $100,000. The equipment has a 10 year expected useful life and $0 residual value. Initially, the company used double declining balance depreciation. On January 1, 2008, the company changed to straight line depreciation. The expected useful life and residual value are unchanged. Compute depreciation expense for 2008. Ignore income taxes.