medium · Investment Banking valuation-core
A company purchases a $500,000 asset. For book purposes, it uses straight-line depreciation over 10 years (50,000 per year). For tax purposes, it uses accelerated depreciation, recognizing 125,000 in Year 1.
If the tax rate is 40%, what is the impact on the Balance Sheet in Year 1?
- A Deferred Tax Liability (DTL) of $30,000 is created.
- A Deferred Tax Asset (DTA) of $30,000 is created.
- Retained Earnings decrease by $50,000 with no tax adjustments.
- Cash increases by $75,000 due to the depreciation difference.
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