In this workout, we're told that a company has bought some PP&E for 100,000 and is depreciating its straightline over five years. Salvage value is estimated to be 0. However, the tax allowable depreciation is different. It's 40% then 30, 20, and 10% each year from years one to four. We've thus got a temporary difference between how the accounts will treat the depreciation and how the tax calculation will treat the depreciation. We're asked to build the five year schedule set out below. So we'll start by doing the company sets of accounts, but then we'll compare that to how the tax calculation will do it. So first of all, what is the gross amount of the PP&E? Well, it's a 100,000 and that will be exactly the same for all five years. The depreciation expense in the company set of accounts will just be that 100,00 and then divided by five, so it'll be 20,000 each year. The net book amounts in the first period will be the 100,00 minus that 20 to give us 80 and that net book amount will gradually go down by 20,000. So the next year, 80,000 minus the 20,000. As I copy that to the right, I should get to a net book amount of 0 in year five and I do. With the tax set of accounts, very similar. We start with the 100,000 as before. We copy that to the right. But our depreciation is slightly different. We start off by taking 40% of the gross amounts. In year two, that changes to 30%. In year three, it changes to 20% and in year four changes to 10%. In the final year, five, that will change to 0% So I can now calculate my net book amounts. In the first year, it's the hundred of gross minus the depreciation of 40, that's 60,000. And that 60 gradually goes down by the new tax allowable depreciation each period. So 60 goes down to 30, which then goes down to 10, which then goes down to 0 and 0 in the final years. Let's just check that this is indeed a temporary difference. If I calculate the total accounting depreciation over the five years, I sum up those five years. 100,000 is depreciated. If I do the same for the tax set of accounts, my tax calculation total up the tax allowable depreciation, 100,000 again. We first calculate the difference each year. The difference in the depreciation expense, it was 20 in the accounting set of accounts. It's 40 in the tax calculation. There's my difference. If I copy that to the right, I can see the situation reverses around about year three. If we now accumulate up the difference at the year end, so it's 20 in the first year, but in the next year that 20 goes up by another 10. If I copy that to the right, I can see that this year end balance gradually goes up, plateaus then comes down, and by year five comes to 0. So what have we got? We've got ourselves to a difference that is only temporary. That gives us deferred tax. My deferred tax in the year is going to be the difference times by my tax rate, which is 35%. Copy that to the right and then look at my deferred tax at the year end, it gradually accumulates up. Starts at 7,000, but then gradually goes up or down by the new deferred tax in the year. Copy that right. If we have a look at what happens then the deferred tax starts at 7,000, goes up to 10,500, plateaus, and then comes down, and eventually goes down to 0. The one question we're left with is is this a deferred tax asset or deferred tax liability? And we'll see that in the next workout.