In considering the difference between tax depreciation and book depreciation with a 21% tax rate, what is the approximate deferred tax liability?

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Multiple Choice

In considering the difference between tax depreciation and book depreciation with a 21% tax rate, what is the approximate deferred tax liability?

Explanation:
The main idea here is that deferred tax liabilities come from temporary differences between tax depreciation and book depreciation. If tax depreciation is larger in the early years, the company gets bigger tax deductions now, which lowers current taxes but creates a liability for those taxes that will be paid later when book depreciation catches up. The deferred tax liability is calculated by applying the tax rate to the net temporary difference that will reverse in the future. In this scenario, applying the 21% tax rate to the cumulative difference between tax and book depreciation yields about 2.1 million. Concretely, a difference of roughly 10 million in depreciation (tax minus book) would generate 0.21 × 10,000,000 = 2,100,000. So the approximate deferred tax liability is 2.1 million. The other options would correspond to different assumed temporary differences (e.g., smaller or larger than 10 million) that don’t align with the given data.

The main idea here is that deferred tax liabilities come from temporary differences between tax depreciation and book depreciation. If tax depreciation is larger in the early years, the company gets bigger tax deductions now, which lowers current taxes but creates a liability for those taxes that will be paid later when book depreciation catches up. The deferred tax liability is calculated by applying the tax rate to the net temporary difference that will reverse in the future.

In this scenario, applying the 21% tax rate to the cumulative difference between tax and book depreciation yields about 2.1 million. Concretely, a difference of roughly 10 million in depreciation (tax minus book) would generate 0.21 × 10,000,000 = 2,100,000.

So the approximate deferred tax liability is 2.1 million. The other options would correspond to different assumed temporary differences (e.g., smaller or larger than 10 million) that don’t align with the given data.

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