Questions:
Our startup company W&J Global purchased networking equipment at the beginning of 2024 for $6,690,055. We use a 10% depreciation method for our fixed assets; however, the taxation authority in our country requires the depreciation of network equipment at 14.9% per year. The taxation rate in our country is 39%. 

What will be the ending carrying amount of this asset in 2026?

The taxation authority in our country requires the depreciation of network equipment at 14.9% per year. The taxation rate in our country is 39%. 

What will the deferred tax liability be in 2026, if any?

Reference answers:
The yearly depreciation for accounting purposes will be 10% of $6,690,055.00, or $669,005.50.

Ending Carrying Amount = Opening carrying amount - Depreciation

| Accounting         |              |              |                        |
|---------------------------|--------------|--------------|------------------------|
| Year                  | Opening Carrying amount | Depreciation  | Ending carrying amount  |
| 2024                  | $6,690,055.00 | $669,005.50  | $6,021,049.50          |
| 2025                  | $6,021,049.50 | $669,005.50  | $5,352,044.00          |
| 2026                  | $5,352,044.00 | $669,005.50  | $4,683,038.50          |

The ending carrying amount in 2026 is $4,683,038.50.

Different rates of depreciation will cause the book value and the tax value of an asset to differ. This difference will show up on the balance sheet as a deferred tax liability. To find the value of this liability, we need to first find the book value, then find the tax value, compute their difference and apply the tax rate.

The yearly depreciation for tax purposes will be 14% of $6,690,055.00, or $996,818.20.

| Tax Purposes       |              |              |                        |
|---------------------------|--------------|--------------|------------------------|
| Year                   | Opening Carrying amount | Depreciation | Ending carrying amount |
| 2024                  | $6,690,055.00 | $996,818.20  | $5,693,236.81          |
| 2025                  | $5,693,236.81 | $996,818.20  | $4,696,418.61          |
| 2026                  | $4,696,418.61 | $996,818.20  | $3,699,600.42          |

# Temporary differences and Deferred Tax Liability

We can compute the,

Temporary Difference = Carrying Amount - Tax Base
Deferred Tax Liability = Temporary Difference * Tax Rate (39%)

$4,683,038.50 - $3,699,600.42 = $983,438.09 
$983,438.09  * 0.39 =  $383,540.85 

# Result

The impact of the purchase in 2026 will be a deferred tax liability of $383,540.85