Kershaw Mfg. depreciates using the straight-line method for financial statement purposes and an accelerated method for tax purposes. The cumulative difference between the two methods grew in the current year. Which of the following is MOST LIKELY TO BE TRUE ?
a. Kershaw reports a deferred tax liability.
b. Kershaw reports neither a deferred tax asset nor a deferred tax liability.
c. Kershaw reports a deferred tax asset
a. Kershaw reports a deferred tax liability.
The tax deduction, and, thus, current tax savings, under accelerated depreciation is greater than with straight-line depreciation. Kershaw, however, will have to pay more taxes later when the tax depreciation is smaller than book depreciation. This is an example of a deferred tax liability. Note: It does not matter that the cumulative difference grew in the current year. That just means that the deferred tax liability is getting larger.]
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