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 MACRS on its income tax return and straight-line depreciation on its financial statements. Each machine costs $12,000 installed, has an economic life of six years for financial reporting, and is in the five-year property class for MACRS. MACRS deductions are 20, 32. 19. 12, 1 1. and 6 percent of cost in each of the first six years, respectively.

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

h. Calculate depreciation for each year using the straight-line method of depreciation.

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

d. Calculate the annual increase in the Deterred Tax Liability account for the balance sheet by multiplying the tax rale. 40 percent. h\ the amount found in the preceding part.

e. Calculate \ ear-end balances for the Deterred Tax Liabilitj account on the balance sheet.

f. It' Equilibrium Company continues to follow its policy of buying a new machine every year for SI 2.1)1)0. what will happen to the balance in the Deferred Tax Liability account on the balance sheet?