Chapter 16 Hw Mail j easternet.edu Question 14 (of 22) 14 10.0 points Ayres Serv

ID: 2542797 • Letter: C

Question

Chapter 16 Hw Mail j easternet.edu Question 14 (of 22) 14 10.0 points Ayres Services acquired an asset for $102 million in 2016. The asset is depreciated for financial reporting purposes over four years on a straight-ine basis (no rosidual value). For tax purposes the assets cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2016, 2017, 2018, and 2019 are as follows S in millions) Pretax accounting income Depreciation on the income statement Depreciation on the tax return 2016 20172018 2019 S 385 S 405 S 420, $ 455 255 25.5 255 25.5 (30.5) (38.5) (20.5) (12.5) Taxable income $380 $392 $ 425 $ 468 Required: Determine (a) the temporary book-tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account. (Negative amounts should be indicated by a minus sign Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Beginning of 2016 End of 2016 End of 2017 End of 2018 End of 2019 Temporary Difference Deferred Tax Liability Check my work

Explanation / Answer

Question number 14

In the question Pre-Tax accounting income is given.

This income is after deducting depreciation as per Income statement because phrase accounting income is stated.

So in order to reach to the Income on which tax can be calculated, we need to do two things:-

Taxable income is thus calculated in the question by following this.

Now the question is asking for calculating temporary book-tax difference for the depreciable asset.

Temporary difference is the amount of difference between expenses and revenues calculated as per accounting system and taxation system.

Therefore temporary book-tax difference for the depreciable asset for a particular year will be,

Depreciation as per accounting system - Depreciation allowable for tax purposes (MACRS)

Higher expense as per accounting system will be deductible temporary difference for future years while in case lower expense as per accounting system it will be taxable temporary difference in the future years.

This is because net expense for all years is fairly the same from both the systems.

Since the question is asking for book-tax difference we will reduce depreciation as per Taxation system from the depreciation as per accounting system (taking depreciation as per accounting system as standard).

Thus figures having negative sign means they are deductible temporary differences while positive figures are taxable temporary differences.

Temporary difference is calculated as follows:

Beginning of 2016

No asset was purchased till then therefore no depreciation,

therefore, temporary difference = 0

End of 2016

Temporary difference = Opening balance + Depreciation as per accounting system - Depreciation allowable for tax purposes (MACRS)

= 0 + 25.5 - 30.5 = -5

End of 2017

Temporary difference = Opening balance + Depreciation as per accounting system - Depreciation allowable for tax purposes (MACRS)

= -5 + 25.5 - 38.5 = -18

End of 2018

Temporary difference = Opening balance + Depreciation as per accounting system - Depreciation allowable for tax purposes (MACRS)

= -18 + 25.5 - 20.5 = -13

End of 2019

Temporary difference = Opening balance + Depreciation as per accounting system - Depreciation allowable for tax purposes (MACRS)

= -13 + 25.5 - 12.5 = 0

Question also demands deferred tax liability for the same timeline.

Deferred tax liability is the amount which is calculated by applying the applicable tax rate on the temporary differences.

Negative deferred tax liability means it is deferredtax asset.

Deferred tax liabilities represent what tax we would have been legally liable to pay, had been allowable revenues and expense for the purpose of tax return were the same as in accounting system. And we make provision of this amount.

Deferred tax liabilities (DTL) is calculated as follows:

Beginning of 2016