Question

Ayres Services acquired an asset for $136 million in 2021. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 25%. Amounts for pretax accounting income, depreciation, and taxable income in 2021, 2022, 2023, and 2024 are as follows:

	($ in millions)
	2021				2022				2023				2024
Pretax accounting income	$	365			$	385			$	400			$	435
Depreciation on the income statement		34				34				34				34
Depreciation on the tax return		(56	)			(44	)			(22	)			(14	)
Taxable income	$	343			$	375			$	412			$	455

Required:
For December 31 of each year, determine (a) the cumulative temporary book-tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account. (Leave no cell blank, enter "0" wherever applicable. Enter your answers in millions rounded to 2 decimal place (i.e., 5,500,000 should be entered as 5.50).)

	Beginning of 2021	End of 2021	End of 2022	End of 2023	End of 2024
Cumulative Temporary Difference
Deferred Tax Liability

Answer 1

Solution:

Ayres Services
Computation of Book tax differences and balance to be reported in deferred tax liability account (In milllions)
Particulars	Beginning of 2018	End of 2018	End of 2019	End of 2020	End of 2021
Depreciation as per tax return	0	$56.0	$44.0	$22.0	$14.0
Depreciation as per books	0	$34.0	$34.0	$34.0	$34.0
Temporary Book tax difference	0	$22.0	$10.0	-$12.0	-$20.0
Cumulative Temporary differences at year end	0	$22.0	$32.0	$20.0	$0.0
Tax rate		25%	25%	25%	25%
Balance to be reported in deferred tax liability account	0	$5.5	$8.0	$5.0	$0.0