Question

Ayres Services acquired an asset for $96 million in 2018. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2018, 2019, 2020, and 2021 are as follows: ($ in millions) 2018 2019 2020 2021 Pretax accounting income $ 370 $ 390 $ 405 $ 440 Depreciation on the income statement 24.0 24.0 24.0 24.0 Depreciation on the tax return (29.0 ) (37.0 ) (19.0 ) (11.0 ) Taxable income $ 365 $ 377 $ 410 $ 453 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. Show all amounts as positive amounts. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Answer:

($ in millions)		December 31
	Cost	2018	2019	2020	2021
Accounting book value	$96	(24)	$72	(24)	$48	(24)	$24	(24)	$0
Tax basis	96	(29)	67	(37)	30	(19)	11	( 11)	0
Difference			$ 5		$18		$13		$0
Tax rate			40%		40%		40%
Deferred tax liability			$ 2		$7.2		$5.2		$0