McQuinn Corp. started operations in 20X5. The company acquired equipment on the first day of operations for a price of $180,000. The equipment will be depreciated for accounting purposes over three years on a straight-line basis. For determining income tax payable, the company can deduct one-half of the purchase cost as CCA in the first year, one-third in the second year, and one-sixth in the third year.
The company’s 20X5 startup was successful, and in 20X6 the company bought identical equipment for $192,000 on the first day of the year. In 20X7, a third set of equipment was
acquired for $198,000 at the beginning of the year. The pattern of depreciation and CCA is proportionately the same for each acquisition. McQuinn’s tax rate is 40%.
The company’s management plans to continue the same level of investment for the foreseeable future, as long as the company remains profitable.

Required:
1. Determine the temporary difference relating to the tax versus accounting bases of the equipment (i.e., CCA versus accounting depreciation) for each year, 20X5 through 20X7. What is the accumulated balance of the temporary difference at the end of each year?
2. What is the balance of the deferred income tax account at the end of each year?
3. What will happen to the accumulated temporary differences and deferred income tax if McQuinn continues to maintain its current level of investment in equipment, replacing each asset as it comes to the end of its useful life?
4. What conditions will be necessary to cause the timing difference balance to decline in future years?
5. Under what conditions will reversal of the accumulated timing differences cause a cash outflow?