Question

Ayres Services acquired an asset for $88 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:

Ayres Services acquired an asset for $88 million in 2018. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset's cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2018, 2019, 2020, and 2021 are as follows: ($ in millions) 2018 2019 2020 2021 Pretax accounting income Depreciation on the income statement Depreciation on the tax return Taxable income $ 350 370 385 420 22.0 22.0 22.0 22.0 (27.0) (35.0) (17.0) (9.0) $ 345 357390 $ 433 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 "o" wherever applicable. Negative amounts entered in the "Temporary Difference" cells should be indicated with a minus sign. All amounts entered in the "Deferred Tax Liability" cells should be entered as positive amounts. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Note: Temporary differences should be computed as depreciation expense on the income statement minus depreciation expense on the tax return (e.g., if depreciation expense is higher on the income statement than on the tax return, the difference will be positive; if depreciation expense is lower on the income statement than on the tax return, the difference will be negative) End of 2018 End of 2019 End of 2020 End of 2021 Temporary Difference Deferred Tax Liability

Answer 1

	2018		2019		2020		2021
DeprecableAsset	Book Value	Depreciation	Book Value	Depreciation	Book Value	Depreciation	Book Value	Depreciation	Balance
Accounting Book Value (i)	88	22	66	22	44	22	22	22	0
Tax Basis (ii)	88	27	61	35	26	17	9	9	0
a.Temporary Dfference (ii-1)		5	5	13	18	5	13	13	0
Tax Rate
			40%		40%		40%		40%
b. Deferred Tax Liabilty			2		7.2		5.2		0