Question

Ayres Services acquired an asset for $100 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: Pretax accounting income Depreciation on the income statement Depreciation on the tax return Taxable income 2018 $ 380 25.0 (20.0) $ 375 ($ in millions) 2019 2020 $ 400 $ 415 25.0 25.0 (38.0) (20.0) $ 387 $ 420 2021 $ 450 25.0 (12.0) $ 463 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).) Beginning of 2018 End of 2018 End of 2019 End of 2020 End of 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	$30.0	$38.0	$20.0	$12.0
Depreciation as per books	$25.0	$25.0	$25.0	$25.0
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