AKP Ltd depreciates a non-current asset using the straight-line method. Tax law stipulates that the asset should be depreciated using the reducing-balance method at 1.5 times the straight line rate. Under normal circumstances, which of the following statements is correct?
A) After year 1, the tax base of the asset exceeds the accounting base and will give rise to a deferred tax liability.
B) After year 1, the tax base of the asset is less than the accounting base and will give rise to a deferred tax liability.
C) After year 1, the tax base of the asset exceeds the accounting base and will give rise to a deferred tax asset.
D) After year 1, the tax base of the asset exceeds the accounting base and will give rise to a tax asset.

Question

Quizplus · Accepted Answer

Under the reducing-balance method, higher depreciation is charged in the earlier years compared to the later years. Therefore, the tax base (which is calculated using the tax depreciation rate) will be lower than the accounting base (which is calculated using the accounting depreciation rate) in the earlier years. As a result, there will be a temporary difference between the tax base and accounting base, giving rise to a deferred tax liability. Therefore, after year 1, the tax base of the asset is less than the accounting base and will give rise to a deferred tax liability.

AKP Ltd Depreciates a Non-Current Asset Using the Straight-Line Method