Deferred tax accounting: taxable temporary differences I Columbara is a textile producer with a reputation for very fast production and delivery of goods. The problem is that labelling of finished items is poor, which leads to customer frustration. The existing labels become detached from garments and customers can’t remember the company’s name. To remedy this, Columbara buys special labelling equipment at the start of x5. The equipment costs 120, has a four-year life and the expected salvage value is zero. For accounting purposes, the equipment is depreciated on a straight-line basis (with a full year’s depreciation in the first year). It qualifies for accelerated depreciation under the tax code: the annual depreciation deduction over the four years is 48, 36, 24, 12.

Columbara expects profit before depreciation and tax to be 90 each year over the next four years.

The current tax rate is 35%. The company takes a balance sheet approach when accounting for deferred taxes. It accounts for all temporary differences between book and taxable income. It expects no other book/tax differences in those years.

Required

(a) What is Columbara’s expected income tax liability each year in the four years x5–x8, given the above facts?

(b) What is the annual income tax expense and net profit it expects to report in its published accounts between x5 and x8? What is the deferred tax liability or asset it expects to report in its balance sheet at the end of each of those years?

Check figure:

(b) Deferred tax expense, x6 2.1 AppenedixLO1