Final answer:
The amount in the deferred tax liability account at the end of year 2 is $400, which is calculated based on the total excess depreciation for tax purposes of $1,000 and the income tax rate of 40%.
Step-by-step explanation:
The question asks to calculate the amount in the deferred tax liability account at the end of year 2. Rosa's pretax accounting income is $3,000 in year 2, and there's an excess depreciation for tax purposes over accounting depreciation of $300 in year 1 and $700 in year 2. The depreciation deduction is expected to reverse by $500 in year 3 and another $500 in year 4. The income tax rate is 40%.
To calculate the deferred tax liability, we initially focus on the excess depreciation for tax purposes because it will result in temporary timing differences between the accounting income reported on the financial statements and the income that is taxable.
At the end of year 2, Rosa has a total excess depreciation of $1,000 ($300 in year 1 and $700 in year 2). This will reverse equally in the next two years. Thus, the deferred tax liability at the end of year 2 is calculated as:
Total excess depreciation for tax purposes = $300 (year 1) + $700 (year 2)
= $1,000
Deferred tax liability = Total excess depreciation × Tax rate
Deferred tax liability = $1,000 × 40%
= $400