In: Accounting
At the beginning of 2019, its first year of operations, Cooke Company purchased an asset for $100,000. This asset has an 8-year economic life with no residual value, and it is being depreciated by the straight-line method for financial reporting purposes. For tax purposes, however, the asset is being depreciated using the MACRS (200%, 5-year life) method.
During 2019, Cooke reported pretax financial income of $51,500 and taxable income of $44,000. The depreciation temporary difference caused the difference between the two income amounts. The tax rate in 2019 was 30%, and no change in the tax rate had been enacted for future years.
Required:
1. | Prepare a schedule that shows for each year, 2019 through 2026, (a) MACRS depreciation, (b) straight-line depreciation, (c) the annual depreciation temporary difference, and (d) the accumulated temporary difference at the end of each year. |
2. | Prepare a schedule that computes for each year, 2019 through 2026, (a) the ending deferred tax liability and (b) the change in the deferred tax liability. |
3. | Prepare Cooke’s income tax journal entry at the end of 2019. |
4. | Next Level Explain what happens to the balance of the deferred tax liability at the end of 2019 through 2026. |