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Question:

On January 1, 2008, Alpha Manufacturers purchased a machine for $2.5 million. For accounting purposes, the asset is depreciated on a 10% straight‐line basis. For tax purposes it is depreciated on a 15% straight‐line basis. On January 1, 2009, the machine is revalued at $2.6 million and it is estimated that the machine will be used for a further 25 years after revaluation. For tax purposes, the revaluation is not recognized. Given a tax rate of 40% and that the machine has zero salvage value for tax and financial reporting purposes, the deferred tax asset or liability on December 31, 2009, is closest to:

A $158,400.
Explaination

Depreciation expense for accounting purposes = 2,500,000 x 10% = $250,000
Depreciation expense for tax purposes = 2,500,000 x 15% = $375,000
Carrying amount on December 31, 2008 = 2,500,000 − 250,000 = $2,250,000
Tax base on December 31, 2008 = 2,500,000 − 375,000 = $2,125,000
Revaluation = 2,600,000 – 2,250,000 = $350,000
Carrying amount on December 31, 2009 = 2,600,000 − (2,600,000 / 25) = 2,496,000
Tax base on December 31, 2009 = 2,125,000 – 375,000 = $1,750,000
Reduction in revaluation surplus = 350,000 x 40% = $140,000
Deferred tax liability = [(2,496,000 − 1,750,000) x 40%] − 140,000 = $158,400