Ayres Services acquired an asset for $64 million in 2021. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). Ayers deducted 100% of the asset's cost for income tax reporting in 2021. The enacted tax rate is 25%. Amounts for pretax accounting income, depreciation, and taxable income in 2021, 2022, 2023, and 2024 are as follows: ($ in millions) 2021 2022 2023 2024 Pretax accounting income $ 360 $ 380 $ 395 $ 430 Depreciation on the income statement 16 16 16 16 Depreciation on the tax return (64 ) (0 ) (0 ) (0 ) Taxable income $ 312 $ 396 $ 411 $ 446 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 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)
Solution:
| Ayres Services | ||||
| Computation of Book tax differences and balance to be reported in deferred tax liability account (In milllions) | ||||
| Particulars | End of 2021 | End of 2022 | End of 2023 | End of 2024 |
| Depreciation as per tax return | $64.0 | $0.0 | $0.0 | $0.0 |
| Depreciation as per books | $16.0 | $16.0 | $16.0 | $16.0 |
| Taxable/(Reversal) of Temporary differences for the year | $48.0 | -$16.0 | -$16.0 | -$16.0 |
| Cumulative Temporary differences at year end | $48.0 | $32.0 | $16.0 | $0.0 |
| Tax rate | 25% | 25% | 25% | 25% |
| Balance to be reported in deferred tax liability account | $12.00 | $8.00 | $4.00 | $0.00 |
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