Question

Ayres Services acquired an asset for $108 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	$	400			$	420			$	435			$	470
Depreciation on the income statement		27.0				27.0				27.0				27.0
Depreciation on the tax return		(32.0	)			(40.0	)			(22.0	)			(14.0	)
Taxable income	$	395			$	407			$	440			$	483

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.

	Beginning 2018	Ending 2018	Ending 2019	Ending 2020	Ending 2021
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	End of 2018	End of 2019	End of 2020	End of 2021
Depreciation as per tax return	$32.0	$40.0	$22.0	$14.0
Depreciation as per books	$27.0	$27.0	$27.0	$27.0
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