Behavior of deferred income tax account when a firm acquires new assets every year. Equilibrium Company has adopted a program of purchasing a new machine each year. It uses a prescribed method of depreciation on its income tax return and straight-line depreciation on its financial statements. Each machine costs $12,000 installed and has an economic life of six years for financial reporting. Equilibrium Company depreciates this equipment for tax purposes using the following percentages of acquisition cost each year: 20%, 32%, 19%, 12%, 11%, and 6% of cost in each of the six years, respectively.

a. Calculate the total depreciation deduction on the tax return for each of the first seven years.

b. Calculate depreciation fur each year using the straight-line method of depredation.

c. Calculate the annual difference in depreciation charges using the results from parts a and b.

d. Calculate the annual increase in the deferred Tax Liability account for the balance sheet by multiplying the tax rate, 40%, by the amount found in part c.

e. Calculate year-end balances for the Deferred Tax Liability account on the balance sheet

f. If Equilibrium Company continues to follow its policy of buying a new machine every year for $12,000, what will happen to the balance in the Deferred Tax Liability account on the balance sheet?