At the beginning of the year a company purchased a fixed asset for $500,000 with no expected residual value. The company depreciates similar assets on a straight-line basis over 10 years, while the tax authorities allow declining balance depreciation at the rate of 15% per year. In both cases the company takes a full year’s depreciation in the first year and the tax rate is 40%. Which of the following statements concerning this asset at the end of the year is most accurate?
The temporary difference is the difference between the net book value of the asset for accounting purposes [500,000 – (500,000/10)] = $450,000 and the net book value for taxes, [500,000 - 0.15(500,000) = $425,000]. 450,000 – 425,000 = $25,000.