Question

Ayres Services acquired an asset for $108 million in 2018. The asset is depreciated for financial...

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

Homework Answers

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
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