Reference no: EM132392671

PROBLEM A Brown Co. purchased a piece of equipment at the beginning of Year 1 for $25,000,000. Management estimates that the equipment will have a useful life of seven years and a $5,000,000 salvage value. The depreciation expense recorded for tax purposes is computed using the double-declining balance method of depreciation. The company uses the straight-line method of depreciation for reporting purposes. Calculate the amount of depreciation expense for reporting purposes for Year 4 (i.e., the fourth full year of depreciation). Then calculate the amount of depreciation expense for tax purposes for Year 4 (Le, the fourth full year of depreciation). Use this information to determine the correct answers to the following two (2) questions:

1. Will a deferred tax asset or a deferred tax liability be created (in Year 5) as a result of the depreciation recorded for tax and financial reporting purposes?

a. Deferred tax asset

b. Deferred tax liability

2. Assuming that the company's tax rate is 25%, what dollar amount (as an absolute value) will be added (if your answer to the prior question was "a") or subtracted (if your answer to the prior question was "b") to the deferred tax account in Year 5 as a result of the depreciation timing difference? Record your answer as a dollar amount rounded to zero (0) decimal places, but do not include the dollar sign or any commas. Answer: