Ayres Services acquired an asset for $80 million in 2013 (A+ Guaranteed)

Ayres Services acquired an asset for $80 million in 2013. 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 2013, 2014, 2015, and 2016 are as follows:

2013 2014 2015 2016

Pretax Accounting income: 330 350 365 400

Depreciation on the income statement 20 20 20 20

Depreciation on the tax return (25) (33) (15) (7)

Taxable income 325 337 370 413

Required:

For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

Here’s the SOLUTION

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