In: Accounting
Ayres Services acquired an asset for $128 million in 2021. The
asset is depreciated for financial reporting purposes over four
years on a straight-line basis (no residual value). For tax
purposes the asset’s cost is depreciated by MACRS. The enacted tax
rate is 25%. Amounts for pretax accounting income, depreciation,
and taxable income in 2021, 2022, 2023, and 2024 are as
follows:
($ in millions) | ||||||||||||||||
2021 | 2022 | 2023 | 2024 | |||||||||||||
Pretax accounting income | $ | 360 | $ | 380 | $ | 395 | $ | 430 | ||||||||
Depreciation on the income statement | 32 | 32 | 32 | 32 | ||||||||||||
Depreciation on the tax return | (55 | ) | (39 | ) | (21 | ) | (13 | ) | ||||||||
Taxable income | $ | 337 | $ | 373 | $ | 406 | $ | 449 | ||||||||
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 2 decimal place (i.e.,
5,500,000 should be entered as 5.50).)
Beginning of 2021 End of 2021 End of 2022 End of 2023 End of 2024
Cumulative Temporary Difference
Deferred Tax Liability
Solution:
Ayres Services | |||||
Computation of Book tax differences and balance to be reported in deferred tax liability account (In milllions) | |||||
Particulars | Beginning of 2021 | End of 2021 | End of 2022 | End of 2023 | End of 2024 |
Depreciation as per tax return | $0.0 | $55.0 | $39.0 | $21.0 | $13.0 |
Depreciation as per books | $0.0 | $32.0 | $32.0 | $32.0 | $32.0 |
Taxable/(Reversal) of Temporary differences for the year | $0.0 | $23.0 | $7.0 | -$11.0 | -$19.0 |
Cumulative Temporary differences at year end | $0.0 | $23.0 | $30.0 | $19.0 | $0.0 |
Tax rate | 25% | 25% | 25% | 25% | 25% |
Balance to be reported in deferred tax liability account | $0.00 | $5.75 | $7.50 | $4.75 | $0.00 |