Question

Ayres Services acquired an asset for $80 million in 2018. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2018, 2019, 2020, and 2021 are as follows: ($ in millions) 2018 2019 2020 2021 Pretax accounting income $ 330 $ 350 $ 365 $ 400 Depreciation on the income statement 20 20 20 20 Depreciation on the tax return (25 ) (33 ) (15 ) (7 ) Taxable income $ 325 $ 337 $ 370 $ 413 Required: Determine (a) the 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. Negative amounts should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Solution a & b:

Ayres Services
Computation of Book tax differences and balance to be reported in deferred tax liability account (In milllions)
Particulars	End of 2018	End of 2019	End of 2020	End of 2021
Depreciation as per tax return	$25.0	$33.0	$15.0	$7.0
Depreciation as per books	$20.0	$20.0	$20.0	$20.0
Taxable/(Reversal) of Temporary differences for the year	$5.0	$13.0	-$5.0	-$13.0
Cumulative Temporary differences at year end	$5.0	$18.0	$13.0	$0.0
Tax rate	40%	40%	40%	40%
Balance to be reported in deferred tax liability account	$2.0	$7.2	$5.2	$0.0