Prob #P1041: Lynch Company began operations in 2016. The company reported $24,00

Question

Prob #P1041: Lynch Company began operations in 2016. The company reported $24,000 of depreciation expense on its income statement in 2016 and $26,000 in 2017. On its tax returns, Lynch deducted $32,000 for depreciation in 2016 and $37,000 in 2017. The 2017 tax return shows a tax obligation (liability) of $19,200 based on a 40% tax rate. a.) Determine the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2016 and 2017. b.) Calculate the deferred tax liability for each year. c.) Calculate the income tax expense for 2017

Explanation / Answer

Answer to Question Number a.)

2016

Depreciation as per accounting record = $24,000

Depreciation as per Tax Return = $32,000

Therefore temporary difference = $8,000 (taxable profit is less than accounting profit by this difference amount)

2017

Depreciation as per accounting record = $26,000

Depreciation as per Tax Return = $37,000

Therefore temporary difference = $11,000 (taxable profit is less than accounting profit by this difference amount)

Answer to Question Number b.)

Deferred tax liability in 2016 = Temporary difference * tax rate

= $8,000 * 40%

= $3,200

Deferred tax liability in 2017 = Temporary difference * tax rate

= $11,000 * 40%

= $4,400

Answer to Question Number c.)

Income tax expense for 2017 = Tax obligation as per tax return + deferred tax liability

= $19,000 + $4,400

= $23,400

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