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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Deferred Tax Liability: Depreciation At the beginning of 2019, its first year of operations, Cooke Company purchased an asset for $100,000. This asset has an 8-year economic life with no residual value, and it is being depreciated by the straight-line method for financial reporting purposes. For tax purposes, however, the asset is being depreciated using the MACRS (200%, 5-year life) method.

During 2019, Cooke reported pretax financial income of $51,500 and taxable income of $44,000. The depreciation temporary difference caused the difference between the two income amounts. The tax rate in 2019 was 30%, and no change in the tax rate had been enacted for future years.

Required:

  1. 1. Prepare a schedule that shows for each year, 2019 through 2026, (a) MACRS depreciation, (b) straight line depreciation, (c) the annual depreciation temporary difference, and (d) the accumulated temporary difference at the end of each year.
  2. 2. Prepare a schedule that computes for each year, 2019 through 2026, (a) the ending deferred tax liability and (h) the change in the deferred tax liability.
  3. 3. Prepare Cooke’s income tax journal entry at the end of 2019.
  4. 4. Next Level Explain what happens to the balance of the deferred tax liability at the end of 2019 through 2026.

1(a)

To determine

Prepare a schedule that shows MACRS depreciation from 2019 through 2026.

Explanation

Prepare a schedule that shows MACRS depreciation from 2019 through 2026:

YearMACRS Depreciation rateMACRS Depreciation (Tax purpose)
 (1)(2)=(1)×$100

1 (b)

To determine

Prepare a schedule that shows straight line depreciation from 2019 through 2026.

1 (c)

To determine

Prepare a schedule that shows the annual depreciation temporary difference from 2019 through 2026.

1 (d)

To determine

Prepare a schedule that shows the accumulated temporary difference from 2019 through 2026.

2 (a)

To determine

Prepare a schedule that calculates the ending deferred tax liability from 2019 through 2026.

2 (b)

To determine

Prepare a schedule that calculates the changes in deferred tax liability from 2019 through 2026.

3.

To determine

Record the income tax journal entry at the end of 2019 for Company C.

4.

To determine

Elaborate the effects of the balance of deferred tax liability from 2019 through 2026.

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