Chapter 8 Homework Lauff Corp. purchases a piece of equipment on 1/01/16 for $20
ID: 2562008 • Letter: C
Question
Chapter 8 Homework
Lauff Corp. purchases a piece of equipment on 1/01/16 for $200,000. Assume a four year service life with zero residual value for both financial reporting (book) purposes and for tax reporting purposes. The only difference is that Lauff Corp. uses sum of the years’ digits depreciation for tax purposes and uses straight line depreciation for book purposes. In each year 2016, 2017, 2018, and 2019, Lauff reports income before depreciation (for book purposes) and taxable income before depreciation deduction (per the tax returns) of $250,000 each year, and is consistently subjected to a 40% income tax rate.
Required (hint: you may want to reference Exhibit 8.1 in completing this assignment):
Determine the amount of depreciation each year for book purposes and tax purposes,
For each year-end determine the book value of the machine and the tax basis of the machine,
For each year-end determine the “future taxable amount” related to the machine,
For each year determine the amount of income tax expense to appear in the income statement,
For each year determine the amount of income tax paid to appear in the cash flow statement, and
Determine the amount of deferred tax liability that will appear in each year-end balance sheet and show the effects on the accounts and financial statements of recording income tax expense for those periods.
Explanation / Answer
1. Depreciation expense - book and tax purpose:
2. WDV for book and tax purpose:
Tax:
Books:
3. Each year end future taxable amount:
* The formula used from Year 2 is Depreciaiton per tax- depreciation per books+ prior year future taxable amount
4. Each yeat income tax expense appearing in income statement:
5. Each year income tax paid appearing in statement of cash flows:
6. Deferred tax liability on the balance sheet:
Deferred tax liability from year 2 onwards is calculated as - Income tax expense- Income tax paid+ Balance in deferred tax liability account in prior year
Cost of the asset 200,000 Life 4 Years Salvage value - Depreciation basis or depreciable value 200,000 Depreciation for book purposes (200,000/4) each year 50,000 Tax purpose - sum of year digits method Sum of years = 1+2+3+4 10 Depreciation year 1 (200,000*4/10) 80,000 Depreciation year 2 (200,000*3/10) 60,000 Depreciation year 3 (200,000*2/10) 40,000 Depreciation year 4 (200,000*1/10) 20,000