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 are as

	($ 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:

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

	(a) Temporary book–tax difference for the depreciable asset
	Book value of asset	$          96
	Temporary Difference	2018	2019	2020	2021
	(a) Book Value on Straight line	$          72	$                   48	$          24	$           -
	(b) Book Value on MARCS basis	$          67	30	11	0
	(c )Temporary Difference (a-b)	$            5	$                   18	$          13	$           -
	(d)Tax Rate	40%	40%	40%	40%
	Deferred Tax Liability (c * d)	$        2.0	$                  7.2	$        5.2	$           -
	(b) Balance to be reported in the deferred tax liability account.
		2018	2019	2020	2021
	(a) Depreciation on Straight line	$          24	$                   24	$          24	$          24
	(b) Depreciation on MARCS basis	$        (29)	$                 (37)	$        (19)	$        (11)
	(c )Temporary Difference (a-b)	$          (5)	$                 (13)	$            5	$          13
	(d)Tax Rate	40%	40%	40%	40%
	Deferred Tax Liability (c * d)	$      (2.0)	$                (5.2)	$        2.0	$        5.2
	In 2018 = ($5 * 0.40)	$        2.0
	In 2019 = ($5+$13 * 0.40)	$        7.2	Offset in 2019	$        2.0
	In 2020 = ($13 * 0.40)	$        5.2	Offset in 2020	$        7.2