Deferred Tax Calculations (Appendix)

Clemente Inc. has reported income for book purposes as follows for the past three years:

(In thousands) Year 1 Year 2 Year 3 Income before taxes $120 $120 $120 Clemente has identifi ed two items that are treated differently in the fi nancial records and in the tax records. The fi rst one is interest income on municipal bonds, which is recognized on the fi nancial reports to the extent of $5,000 each year but does not show up as a revenue item on the company’s tax return. The other item, equipment, is depreciated using the straight-line method at the rate of $20,000 each year for fi nancial accounting but is depreciated for tax purposes at the rate of $30,000 in Year 1, $20,000 in Year 2, and $10,000 in Year 3.
Required 1. Determine the amount of cash that Clemente paid for income taxes each year.
Assume that a 40% tax rate applies to all three years.
2. Calculate the balance in the Deferred Tax account at the end of Years 1, 2, and 3.
How does this account appear on the balance sheet?AppendixLO1