Question

At the start of business, the Miller Company acquired a $120,000 piece of equipment that was to be depreciated on a straight-line method basis for financial statement purposes but on an accelerated depreciation basis for income tax purposes. The Miller Company employed a half-year convention under which only one-half of the first year’s depreciation expense would be taken regardless of when an asset was purchased and placed in service. The company also followed the accounting practice that if the level of accelerated depreciation charges fell below the level of straight-line depreciation charges (such as in Year 4 in the schedule below), the company would switch from accelerated depreciation to a straight-line approach. The company’s CFO prepared the following depreciation schedule for financial statement and income tax purposes.

	Straight-Line Depreciation	Accelerated Depreciation
Year 1	$ 10,000	$ 20,000
Year 2	20,000	33,334
Year 3	20,000	22,223
Year 4	20,000	14,816
Year 5	20,000	9,876
Year 6	20,000	9,876
Year 7	10,000	9,875
	$120,000	$120,000

Required

Assuming a 30 percent effective tax rate, prepare a schedule illustrating the deferred income tax effects for Year 1 through Year 7 associated with this asset.

Round answers to the nearest whole number. Use rounded answers to sum totals. (Totals may not equal due to rounding.)

					Deferred Income Tax
Year	Straight-Line Depreciation	Accelerated Depreciation	Difference	Tax Effect	Asset	Liability
1	$10,000	$20,000	Answer	Answer	Answer	Answer
2	20,000	33,334	Answer	Answer	Answer	Answer
3	20,000	22,223	Answer	Answer	Answer	Answer
4	20,000	14,816	Answer	Answer	Answer	Answer
5	20,000	9,876	Answer	Answer	Answer	Answer
6	20,000	9,876	Answer	Answer	Answer	Answer
7	10,000	9,875	Answer	Answer	Answer	Answer
Totals	$120,000	$120,000	$0	$0	Answer	Answer

Answer 1

ear	Straight-Line Depreciation	Accelerated Depreciation	Difference	Tax Effect	Asset	Liability
1	$10,000	$20,000	($10,000)	($3,000)		DTL
2	20,000	33,334	($13,334)	($4,000)		DTL
3	20,000	22,223	($2,223)	($667)		DTL
4	20,000	14,816	$5,184	$1,555		DTL
5	20,000	9,876	$10,124	$3,037		DTL
6	20,000	9,876	$10,124	$3,037		DTL
7	10,000	9,875	$125	$38		DTL
Totals	$120,000	$120,000	$0	$0		DTL