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2. On January 2, 2017, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below: Tax Depreciation 2017 2018 2019 2020 Total $264,000 $360,000 $120,000 $56,000 $800,000 3. The enacted tax rates are 40% for all years. Instructions (a) Prepare a schedule comparing depreciation for financial reporting and tax purposes. (b) Determine the deferred tax (asset) or liability at the end of 2017.

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Answer:

The solution to the given problem is done below.

Explanation:

(a)            Depreciation

            for Financial              Depreciation for Temporary

Year         Reporting Purposes           Tax Purposes            Difference

2017           $160,000                          $264,000          (104,000)

2018           $160,000                          $360,000          (200,000)

2019           $160,000                           $120,000            40,000

2020           $160,000                           $56,000            104,000

2021                  $160,000                                      0                        $160,000

                         $800,000                            $800,000                   0

(b)                        2018       2019          2020         2021           Total  

Future taxable

amounts:

Depreciation     $(200,000)      $40,000      104,000    $160,000    $104,000

Deferred tax liability: $104,000 × 40% = $41,600 at the end of 2017.

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