Question

Gopher Hunter Company reported depreciation of $100,000 each year for the first 5 years of business. Gopher reported tax depreciation of $200,000, $150,000, $80,000, $50,000 and $10,000 for years 1, 2, 3, 4, and 5, respectively. Assuming a 21% enacted tax rate, describe the cumulative temporary difference.

Answer 1

The cumulative difference is a deferred tax asset of $ 2100.

Step-by-step explanation:

The easiest approach to answering this question will be to use table differentiating the amounts for each year between accounting depreciation and tax depreciation

We will shorten amount to thousands to make the layout easier to read.

Year 1 Depreciation - 100 Tax - (200) Difference (100) Tax at 21% - (21)

Year 2 Depreciation - 100 Tax - (150) Difference (50) Tax at 21% - (10,5)

Year 3 Depreciation - 100 Tax - (80) Difference 20 Tax at 21% - 4,2

Year 4 Depreciation - 100 Tax - (50) Difference 50 Tax at 21% - 10,5

Year 5 Depreciation - 100 Tax - (10) Difference 90 Tax at 21% - 18,9

Cumulative temporary difference over the 5 year period = 2,1 or 2100 deferred tax asset. It's recognised as an asset as we will pay more tax in the current period, but less tax in the future. Tax liabilities reduce tax payable in the current period, but increase tax payable in the future.