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bodhibe
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Joined: 16 Feb 2012
Online Status: Offline
Posts: 2

Posted: 21 May 2012 at 15:30 \| IP Logged

I am struggling with the answer to the following
question:

Miro Co. began business on January, 2, 2009. Miro used
the double-declining balance method of depreciation for
financial statement purposes for its building, and the
straight-line method for income taxes. On January 16,
2011, Miro elected to switch to the straight-line method
for both financial statement and tax purposes. The
building cost $240,000 in 2009, which has an estimated
useful life of 16 years and no salvage value. Data
related to the building is as follows:

Year     Double-declining
balance depreciation     Straight-line depreciation
2009      $30,000  & nbsp;   $15,000
2010         26 ,250         15 ,000
Miro’s tax rate is 40%. Which of the following
statements is correct?

The correct answer is:
Miro’s deferred tax asset should be decreased by $750 in
2011.

From my understanding, 2009 and Why isn't the net an
increase 2010 created a DTL of $10,500. 2011 created an
increase in a DTA account of $750. Why is the
answer decrease? Netted, it is a DTL decrease but the
answer states asset.

Any insight would be appreciated!
Thank you

faisy
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Newbie

Joined: 08 May 2010
Location: Australia
Online Status: Offline
Posts: 23

Posted: 25 May 2012 at 01:34 \| IP Logged

Let me show you how to do the computation.

F/S ------------------------I/Tax

Year     DDL-----------------------------SLM

2009    $30,000--->DTA15000-----$15,000
2010    $26,250--->DTA15000-----$15,000

F/S Depr is changed now and lower than Tax Depr.

Cost =240000-(30000+26250)=183750/14 =$13125

2011 $13,125--->DTL1875-----$15,000

so the DTL would increase by 1875*.4=$750

This DTL would reduce previous accumulated DTA by $750.

The other way of doing is (56250-30000)/14 which become exactly the same $1875. emember you can not reduced all the DTA amount in year 11. you will have to do it on evenly basis through out the remaining life of the equipment.

thanks

Faisy

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Faisy

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