Question
Marlowe Freight bought a truck on January 1, 2025 for $300,000. In its accounts the truck is depreciated straight-line over 5 years with no residual value. The tax authority allows it to be written off over 3 years — $100,000 a year. The tax rate is 25% and has not changed.
At December 31, 2025 Marlowe correctly recognised a deferred tax liability of $10,000. For 2026, profit before tax is $500,000; the truck is the only difference between the accounting and tax figures. Tax for 2026 will be paid in 2027.
Required:
- Temporary Difference — the taxable temporary difference on the truck at December 31, 2026.
- Current Tax — the current tax payable for 2026.
- Journal Entry — the December 31, 2026 income tax entry. Use Income Tax Expense, Income Tax Payable and Deferred Tax Liability.
Statements in this challenge
- Temporary DifferenceNumeric Answer
- Current TaxNumeric Answer
- Journal EntryJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 16 — Property, Plant and Equipment
Depreciation spreads the depreciable amount — cost less residual value — over the asset's useful life. Establish the depreciable amount, the method and the period of ownership within the year before computing anything; a mid-year acquisition or disposal is charged only for the months held.
Common mistakes
- Deducting residual value under the reducing-balance method, where the rate applies to carrying amount instead.
- Charging a full year on an asset bought or sold part-way through the period.
- Continuing to depreciate an asset once its carrying amount has reached residual value.
Further readingStraight-line depreciation, worked