Ayres Services acquired an asset for $116 million in 2016. The asset is deprecia

Question

Ayres Services acquired an asset for $116 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: (S in millions) Pretax accounting income Depreciation on the income statement Depreciation on the tax returm 2016 2017 2018 2019 S 420 S440 S 455 S 490 29.0 (34.0) (42.0) (24.0 (16.0) 29.0 29.0 29.0 Taxable income S 415 S 427 460 503 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

Beginning of 2016 End 0f 16 End of 2017 End of 2018 End of 2019 Depreciation on the income statement (a) - $29 $29 $29 $29 Depreciation on the Tax return (b) $34 $42 $24 $16 Temporary Difference (a-b) - -$5 -$13 $5 $13 Deffered Tax liability @40% Nil $2 $5 -$2 -$5

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