Homework Answers
A. Book basis at the end of first year = $20000 - $2000 = $18000
B. Tax basis at the end of first year = $20000 - $6000 = $14000
C. Deferred Tax Liability = (Book basis - Tax Basis) X tax rate = (18000 - 14000) X 40% = $1600
Income tax payable = (income before tax and depreciation - tax depreciation) X tax rate = ($40000 - $6000) X 40% = $13600
Income tax expense = income tax payable + deferred tax liability = $13600 + $1600 = $15200
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