VPI, Inc. purchased a piece of office equipment on April 1 for $550,000. They use straight-line depreciation and estimated that the asset has a useful life of 10 years with no salvage value. For tax purposes the asset has a 7 year class life and qualifies for the Section 179 deduction. The book and tax depreciation schedules for the asset are as follows: Book Tax Difference 2021 $41,250 $100,075 ($58,825) 2022 $55,000 $128,625 ($73,625) 2023 $55,000 $91,875 ($36,875) 2024 $55,000 $65,625 ($10,625) 2025 $55,000 $46,725 $8,275 2026 $55,000 $46,725 $8275 2027 $55,000 $46,725 $8,275 2028 $55,000 $23,625 $31,375 2029 $55,000 $55,000 2030 $55,000 $55,000 2031 $13,750 $13,750 VPI, Inc. is currently subject to a tax rate of 21%, but due to current tax reform initiatives happening in Washington, the accounting staff believe that Congress will pass legislation that will raise their tax rate to 35% within the next two years. Since the deferred tax liability created by the current period tax difference isn't expected to reverse until after the expected tax rate change, they calculated the DTL using the 35% rate. The staff only used the 35% rate when calculating the deferred tax effects of this asset. The 21% rate was used for all other deferred tax calculations. Maggie isn't sure which rate should have been used in the calculations. 7 1. What was the entry that the accountants at VPI, Inc. made to record the deferred tax effects of this asset? 2. If the appropriate rate to be used is 21%, what entry should they have made? 3. If the appropriate rate to be used is 21%, what entry is now needed to adjust the accounts to their correct balances? |