Question

I don't understand why end 2019 is not $13 and why end of 2020 is not $5.

Ayres Services acquired an asset for $106 million in 2018. 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 2018, 2019, 2020, and 2021 are as follows: Pretax accounting income Depreciation on the income statement Depreciation on the tax return Taxable income 2018 $ 395 - 26.5 (31.5) $ 390 ($ in millions) 2019 2020 $ 415 $ 430 26.5 26.5 (39.5) (21.5) $ 402 $ 435 2021 $ 465 26.5 (13.5) $ 478 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. (Leave no cell blank, enter "O" wherever applicable. Show all amounts as positive amounts. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) Answer is not complete. End of 2018 End of 2019 End of 2020 End of 2021 Beginning of 2018 0.0 Temporary Difference Deferred Tax Liability $ $ 5.0 2.0 $ 5.2 Ⓡ$ 13.0 5.2 $ $ 0.0 0.0 0.0 $

Answer 1

Temporary difference should not be calculated only for the current year. It shall be calculated for the cumulative years, so that the temporary difference for the current year along with the temporary difference for the previous year should be added to get the total temporary difference. You can understand with the above calculations.

2020 Total S.no Particulars 2018 2019 2021 1 Depreciation (Income Statement) 2 Depreciation (Tax Return) 3 Cumulative Depreciation (Income Statement) 4 Cumulative Depreciation (Tax Return) 5 Temporary Difference (3+4) 6 Defered Tax Liability (5 x Tax rate of 40%) 26.5 106 26.5 26.5 26.5 39.5 -31.5 -21.5 13.5 -106 26.5 53 79.5 106 31.5 -5 -2 -71 -92.5 -106 -18 13 -7.2 -5.2