Staples Corporation would have had identical income before taxes on both its income tax returns and its income statements for the years 2020 through 2023 except for a depreciable asset that cost $120,000. The asset was depreciated for income tax purposes using the following amounts: 2020, $48,000; 2021, $36,000; 2022, $24,000; and 2023, $12,000. However for accounting purposes the straight-line method was used (that is, $30,000 per year). The accounting and tax periods both end December 31. There were no deferred taxes at the beginning of 2020. The depreciable asset has a four-year estimated life and no residual value. The tax rate for each year was 25%. Pretax GAAP income amounts for each of the four years were as follows.
Year Pretax GAAP Income
2020 $230,000
2021 250,000
2022 240,000
2023 240,000
a. Prepare a schedule to compute the increase to income tax payable on December 31, 2020, 2021, 2022, and 2023.
Dec. 31, 2020 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023
Taxable income Tax rate 25% 25% 25% 25%
Income tax payable increase b. Prepare a schedule to determine the deferred tax balances on December 31, 2020, 2021, 2022, and 2023.
Assume a zero-beginning balance in the deferred tax liability account on January 1, 2020.
Note: Do not use negative signs with your answers.
2020 2021 2022 2023
GAAP basis of depreciable asset Tax basis of depreciable asset Difference between GAAP and tax bases Tax rate 25% 25% 25% 25%
AnswerDeferred tax liability, ending balanceDeferred tax asset, ending balance c. Record the income tax journal entry on December 31, 2020, 2021, 2022, and 2023.
Note: List multiple debits (when applicable) in alphabetical order and list multiple credits (when applicable) in alphabetical order.
Note: If the journal entry includes an extra line that is not required, select "N/A" as the account name and leave the Dr. and Cr. answers blank (zero) in the very last row of the journal entry.
d. For each year show how the deferred income tax amount would be reported on the balance sheet.
Balance Sheet, Dec. 31 2020 2021 2022 2023
e. Prepare the income tax section of the income statement for 2020 and provide the disclosure of current and deferred tax expense.
Note: Do not use negative signs with your answers.
Partial Income Statement
For the year ended December 31, 2020 Income before income taxes Net income Financial Statement Disclosure 2020
Current tax expense Deferred tax expense Total income tax expense