Chapter 18, Problem 7P

1 (a)

To determine

Prepare a schedule that shows MACRS depreciation from 2016 through 2023.

Explanation of Solution

Prepare a schedule that shows MACRS depreciation from 2016 through 2023:

Year	MACRS Depreciation rate	MACRS Depreciation (Tax purpose)
	(1)	$\left(2\right)=\left(1\right)\times \$100,000$
2016	20%	$20,000
2017	32%	$32,000
2018	19.20%	$19,200
2019	11.52%	$11,520
2020	11.52%	$11,520
2021	5.76%	$5,760
2022	0%	$0
2023	0%	$0

Table (1)

1 (b)

To determine

Prepare a schedule that shows straight line depreciation from 2016 through 2023.

Explanation of Solution

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Prepare a schedule that shows straight line depreciation from 2016 through 2023.

Given, the cost of the asset is $100,000 and the estimated useful life is 8 years. So, the straight line depreciation is $12,500 $\left(\frac{\$100,000}{8\text{ years}}\right)$ for each year.

Year	Straight line Depreciation    (Financial reporting  purpose)
2016	$12,500
2017	$12,500
2018	$12,500
2019	$12,500
2020	$12,500
2021	$12,500
2022	$12,500
2023	$12,500

Table (2)

1 (c)

To determine

Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2023.

Explanation of Solution

Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.

Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2023:

Year	MACRS Depreciation (Tax purpose)	Straight line Depreciation    (Financial reporting  purpose)	Temporary difference of annual depreciation
2016	$20,000	$12,500	$7,500
2017	$32,000	$12,500	$19,500
2018	$19,200	$12,500	$6,700
2019	$11,520	$12,500	($980)
2020	$11,520	$12,500	($980)
2021	$5,760	$12,500	($6,740)
2022	$0	$12,500	($12,500)
2023	$0	$12,500	($12,500)

Table (3)

1 (d)

To determine

Prepare a schedule that shows the accumulated temporary difference from 2016 through 2023.

Explanation of Solution

Prepare a schedule that shows the accumulated temporary difference from 2016 through 2023:

Year	Temporary difference of annual depreciation	Accumulated Temporary difference
2016	$7,500	$7,500
2017	$19,500	$27,000
2018	$6,700	$33,700
2019	($980)	$32,720
2020	($980)	$31,740
2021	($6,740)	$25,000
2022	($12,500)	$12,500
2023	($12,500)	$0

Table (4)

Note: The temporary difference is computed in Table (3) of requirement 1 (c).

2 (a)

To determine

Prepare a schedule that calculates the ending deferred tax liability from 2016 through 2023.

Explanation of Solution

Deferred tax liability: Deferred tax liability is created, if the tax obligation (income tax payable) is deferred temporarily due to differences in reporting revenue or expense at different time periods on the income statement (financial reporting) and on tax return (tax reporting).

Prepare a schedule that calculates the ending deferred tax liability from 2016 through 2023:

Year	Accumulated Temporary difference	Tax rate	Ending deferred tax liability
2016	$7,500	30%	$2,250
2017	$27,000	30%	$8,100
2018	$33,700	30%	$10,110
2019	$32,720	30%	$9,816
2020	$31,740	30%	$9,522
2021	$25,000	30%	$7,500
2022	$12,500	30%	$3,750
2023	$0	30%	$0

Table (5)

Note: The accumulated temporary difference is computed in requirement 1 (d).

2 (b)

To determine

Prepare a schedule that calculates the changes in deferred tax liability from 2016 through 2023.

Explanation of Solution

Prepare a schedule that calculates the changes in deferred tax liability from 2016 through 2023:

Year	Ending deferred tax liability	Beginning deferred tax liability	Change in deferred tax liability
2016	$2,250	$0	$2,250
2017	$8,100	$2,250	$5,850
2018	$10,110	$8,100	$2,010
2019	$9,816	$10,110	($294)
2020	$9,522	$9,816	($294)
2021	$7,500	$9,522	($2,022)
2022	$3,750	$7,500	($3,750)
2023	$0	$3,750	($3,750)

Table (6)

Note: The ending deferred tax liability is computed in requirement 2 (a) and the ending deferred tax liability of 2016 is the beginning deferred tax liability for 2017 and so on

3.

To determine

Record the income tax journal entry at the end of 2016 for Company C.

Explanation of Solution

Record the income tax journal entry at the end of 2016 for Company C.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2016
December 31	Income tax expense (1)		$15,450
	Income tax payable (2)			$13,200
	Deferred tax liability			$2,250
	(To record the income tax payable )

Table (7)

• Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
• Income tax Payable is a liability and it is increased. Thus, it is credited.
• Deferred tax liability is a liability and it is increased. Thus, it is credited.

Working note 1: Determine the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\text{Income tax payable}+\text{Deferred tax liability}\\ \text{=\$13,200}+\$2,250\\ \text{=\$15,450}\end{array}$

Working note 2: Determine the income tax payable:

Given, the taxable income is $44,000 and the tax rate is 30%.

$\begin{array}{c}\text{Income tax payable}=\text{Taxable income}\times \text{Corporate tax rate}\\ \text{=\$44,000}\times \text{30\%}\\ \text{=\$13,200}\end{array}$

Note: The deferred tax liability is $2,250 for year 2016 as computed in Table (6).

4.

To determine

Elaborate the effects of the balance of deferred tax liability from 2016 through 2023.

Explanation of Solution

As per table (5), the balance of the deferred tax liability account increases (originates) at the end of 2016 from $2,250 to $10,110 in 2018 , and then declines (reverses) at the end of 2019 through 2023, which reduces to zero at the end of 2023.