Wapato Corporation purchased a new piece of equipment at the beginning of Year 1 for $1,000,000. The expected life of the asset is 20 years with no residual value. The company uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes (the accelerated method results in $120,000 of depreciation in Year 1 and $100,000 of depreciation in Year 2). The company’s federal income tax rate is 21 percent. The company determined its income tax obligations for Year 1 and Year 2 were $400,000 and $625,000, respectively.

Required:
1. Compute the deferred income tax amount reported on the balance sheet for each year. Explain why the deferred income tax is a liability.
2. Compute income tax expense for each year.