Ayres Services acquired an asset for $88 million in 2016. The asset is depreciat

Question

Ayres Services acquired an asset for $88 million in 2016. 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 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2016, 2017, 2018, and 2019 are as follows: 2019 $ 350 370 385 420 22.0 ($ in millions) 2017 22.0 2016 2018 Pretax accounting income Depreciation on the income statement Depreciation on the tax return 22.0 (27.0)(35.0)(17.0) (9.0) 22.0 laxable income $ 345 357 390 433 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

Explanation / Answer

Amount $ in Millions Particulars Beginning of the 2016 End of the 2016 End of the 2017 End of the 2018 End of the 2019 a Temporary Difference (e-d) 0                    5                  13                  (5)                 (13) b Deferred Tax Liabilty   (a*40%) 0                    2                    5                  (2)                  (5) d Depreciation as per Income Statement                  22                  22                  22                  22 e Depreciation as per Tax Return                  27                  35                  17                    9

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