Ouyang Inc acquires a piece of equipment and uses straightli

Ouyang Inc. acquires a piece of equipment and uses straight-line depreciation for the first year of use while it uses the accelerated depreciation method for tax purpose. Ouyang Inc. is very likely to report in the first year of usage:

Solution

Staright line method will create a greater income in the books than the accelerated depreciation method for tax purposes as the depreciation under acclerated depreciation is higher. Thus, the income tax paid will be less than that recognized in the income statement and a deferred tax liability will be created.

Correct option is A.