Ayres Services acquired an asset for $200 million in 2021. The asset is depreciated for financial reporting purposesover 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 25%. Amounts for pretax accounting income, depreciation, and taxable income in 2021, 2022,2023, and 2024 are as follows:2021$405 $425($ in millions)2022 2023 2024$440Pretax accounting incomeDepreciation on the incomestatementDepreciation on the taxreturn$47550505050(64)(84)(30)(22)Taxable income$391 $391$460$503Required:For December 31 of each year, determine (a) the cumulative temporary book-tax difference for the depreciable assetand (b) the balance to be reported in the deferred tax liability account. (Leave no cell blank, enter "O" whereverapplicable. Enter your answers in millions rounded to 2 decimal place (i.e., 5,500,000 should be entered as 5.50).)Beginning of End of2021End ofEnd ofEnd of2021202220232024Cumulative TemporaryDifferenceDeferred Tax Liability

Differed Tax Liability: It is created when there are temporary differences book tax and actual income tax.Temporary Difference : Tax Depreciation - Book depreciation Differed Tax Liability : cumulative Temporary Difference * Tax Rate a) computation of cumulative temporary book tax difference;- PARTICULARS BEGINNING OF 2021 ENDING OF 2021 ENDING OF 2022 ENDING OF 2023 ENDING OF 2024 tax depreciation (A) 0 64 84 30 22 book depreciation (B) 0 50 50 50 50 temporary difference (A-B) 0 14 34 (20) (28) cumulative temporary difference 0 0 (0+14) 48 (14+34) 28 (48-20) 0 (28-28) b) Differed tax liability account; ($ in millions) PARTICULARS BEGINNING OF 2021 ENDING OF 2021 ENDING OF 2022 ENDING OF 2023 ENDING OF 2024 Cumulative temporary difference 0 14 48 28 0 X tax rate 25% 25% 25% 25% 25% Deferred tax liability 0 3.5 12 7 0

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Ayres Services acquired an asset for $200 million in 2021. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset's cost is depreciated by MACRS. The enacted tax rate is 25%. Amounts for pretax accounting income, depreciation, and taxable income in 2021, 2022, 2023, and 2024 are as follows: ($ in millions) 2021 2022 2023 2024 $405 $425 $440 $475 Pretax accounting income Depreciation on the income statement Depreciation on the tax return 50 50 50 50 (64) (84) (30) (22) Taxable income $391 $391 $460 $503 Required: For December 31 of each year, determine (a) the cumulative 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. Enter your answers in millions rounded to 2 decimal place (i.e., 5,500,000 should be entered as 5.50).) Beginning of End of 2021 End of End of End of 2021 2022 2023 2024 Cumulative Temporary Difference Deferred Tax Liability

Ayres Services acquired an asset for $200 million in 2021. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset's cost is depreciated by MACRS. The enacted tax rate is 25%. Amounts for pretax accounting income, depreciation, and taxable income in 2021, 2022, 2023, and 2024 are as follows: ($ in millions) 2021 2022 2023 2024 $405 $425 $440 $475 Pretax accounting income Depreciation on the income statement Depreciation on the tax return 50 50 50 50 (64) (84) (30) (22) Taxable income $391 $391 $460 $503 Required: For December 31 of each year, determine (a) the cumulative 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. Enter your answers in millions rounded to 2 decimal place (i.e., 5,500,000 should be entered as 5.50).) Beginning of End of 2021 End of End of End of 2021 2022 2023 2024 Cumulative Temporary Difference Deferred Tax Liability

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Iowa Corporation began operations in January 2021 and purchased an equipment for $60,000. Iowa uses straight-line depreciation over 4 years, for financial reporting purposes. For tax purposes, the equipment is fully depreciated in the year of purchase. Pretax accounting income for 2021 was $200,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate is 25% for all years. There are no other differences between accounting and taxable income. Required: a. Calculate taxable income in 2021. b. Prepare journal entry in 2021. c. Prepare journal entry assuming taxable income in 2022 is $180,000.
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