Wheeler Co. purchased machinery on 1/1/2022 for $450,000. Assuming no salvage value, Wheeler depreciated the asset straight line over a 5-year life and assumed a residual value of $40,000 for Book purposes. For taxes, the asset is also depreciated over a 5-year life, but with the assumption of no residual value for Tax purposes. Required: (a) What would be the balance in the Deferred Tax Liability account for the 2021 and 2022, assuming a 21% tax rate? (b) On 1/1/2023, Nancy Wheeler, the CEO of Wheeler Co, realized the asset had no additional productive value and sold the asset for $240,000. General Ledger Year Depreciation as per book Depreciation as per Tax Depreciation difference Tax rate Deferred tax liability Closing balance at the end of the each year 2022 82000 1680 1680 90000 90000 2023 82000 1680 3360 2024 90000 1680 5040 2025 90000 1680 6720 2026 90000 1680 8400 0 8400 adjusted basis sales value gain/loss tax expense 82000 82000 82000 360000 240000 120000 25200 8000 8000 8000 8000 8000 1 Cash Account Machinery Account 2 Machinery Account Profit and Loss account Deferred Taxes, 2022 Deferred Taxes, 2023 Tax Expense, 1/1/2024 3 Income tax expenses Income tax provision 21% 21% 21% 21% 21% Debit 240000 240000 50400 1680 1680 25200 Credit 240000 240000 50400 tax on gain or loss, and reversal of deferred tax

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A:

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Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.