Question

Ayres Services acquired an asset for $160 million in 2021. The asset is depreciated for financial reporting purposes over four years on a straight line basis (no residual value). For tax purposes the asset's cost is depreciated by MACRS. The enacted tax rate is 25% Amounts for pretax accounting income, depreciation, and taxable income in 2021 2022 2023, and 2024 are as follows: 666 ($ in millions) 2022 2023 O 415 2021 $ 0 2024 Pretax accounting income Depreciation on the incostatt Depreciation on the tax return Taxable in (59) $361 (59) $381 (25) 540 (12) 5473 Required: For December 31 of each year, determine (a) the cumulative temporary book tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account. (Leave no cell blank, enter "o" wherever applicable. Enter your answers in millions rounded to 2 decimal place (ie, 5,500,000 should be entered as 5.50).) Beginning of 2021 End of 2021 End of 2022 End of 2023 End of 2074 Cumulative Temporary Derence Deferred Tax Liability

Answer 1

Remember a simple logic, if the taxable income is less than accounting income, we are paying less tax that means we owe more tax in future, so the result is deferred tax liability. Similarly deferred tax asset will also arise. Find the attached image for the answer, where direct figures are included without any calculation, following tax rate @25%.

	Beg of 2021	End of 2021	End of 2022	End of 2023	End of 2024
Cumulative temporary tax difference	0	19	38	23	0
Deferred tax liability	0	4.75	9.5	5.75	0

One can understand the mechanism of deferred tax here, when the asset life came to an end, deferred tax has become zero.

*The column is cumulative tax difference, so the difference of year is added one by one.