Question

2. On January 2, 2017, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below: Tax Depreciation 2017 2018 2019 2020 Total $264,000 $360,000 $120,000 $56,000 $800,000 3. The enacted tax rates are 40% for all years. Instructions (a) Prepare a schedule comparing depreciation for financial reporting and tax purposes. (b) Determine the deferred tax (asset) or liability at the end of 2017.

Answer 1

The solution to the given problem is done below.

Step-by-step explanation:

(a) Depreciation

for Financial Depreciation for Temporary

Year Reporting Purposes Tax Purposes Difference

2017 $160,000 $264,000 (104,000)

2018 $160,000 $360,000 (200,000)

2019 $160,000 $120,000 40,000

2020 $160,000 $56,000 104,000

2021 $160,000 0 $160,000

$800,000 $800,000 0

(b) 2018 2019 2020 2021 Total

Future taxable

amounts:

Depreciation $(200,000) $40,000 104,000 $160,000 $104,000

Deferred tax liability: $104,000 × 40% = $41,600 at the end of 2017.