At the beginning of 2007, its first year of operations, Cooke Company purchased an asset for $100,000. This asset has an eight-year economic life with no residual value, and it is being depreciated by the straight-line method for financial reporting purposes. For tax purposes, however, the asset is being depreciated using the MACRS (200%, 5-year life) method.

During 2007, the company reported pretax financial income of $51,500 and taxable income of $44,000. The depreciation temporary difference caused the difference between the two income amounts. The tax rate in 2007 was 30% and no change in the tax rate had been enacted for future years.

Required

1. Prepare a schedule that shows for each year, 2007 through 2014, (a) MACRS depreciation, (b) straight-line depreciation, (c) the annual depreciation temporary difference, and (d) the accumulated temporary difference at the end of each year.

2. Prepare a schedule that computes for each year, 2007 through 2014, (a) the ending deferred tax liability, and (b) the change in the deferred tax liability.

3. Prepare the income tax journal entry at the end of 2007.

4. Explain what happens to the balance of the deferred tax liability at the end of 2007 through 2014.