Year	Double-declining Balance Depreciation	Straight-line Depreciation
2000	$30,000	$16,000
2001	20,000	16,000

Miro’s tax rate is 40%.  Which of the following state­ments is correct?

a. There should be no reduction in Miro's deferred tax liabilities or tax assets in 2002

b.  Miro's deferred tax liability should be reduced by 7200 in 2002

c.  Miro's deferred tax asset should be reduced by 7200 in 2002

d.  Miro's deferred tax asset should be increased by 7200 in 2002

Pheepa,

Not sure where you got this question from. In becker, the same question is given but with a different option

There should be no increase in deferred tax asset-this happens to be the correct answer! I have tried to explain it here;

A Deferred tax asset is booked when the current taxable income is >than the current financial income, in other words the future taxable income is expected to be less than the future financial income.

A Deferred tax Liability is just the opposite, future taxable income is expected to be more than the future financial income.

In this example, in the years 2000 and 2001 the tax depreciation is less than the book depreciation. This means the taxable income(current) is greater than the book income. This calls for a deferred tax asset.

However, for 2002-tax depreciation $16000 is more than book depreciation (240,000-50,000)/13=$14,615. This means current taxable income is less than current book income , calling for a future liability . This is booked as a reduction in deferred tax asset.

Hope it helps!