On January 1 of each of the first four years of its existence, Allway Company purchases a new unit of equipment. Each unit has a four-year life and zero salvage value, costs \(\$ 100,000\), and is depreciated for GAAP and tax purposes as shown below. The income tax rate is \(25 \%\). Allway has a deferred tax liability of \(\$ 12,500\) at the end of year 3. The current year is year 4 , and pretax GAAP income is \(\$ 30,000\). Amounts are in thousands.

Required

a. Record the income tax entry at the end of year 4.

b. Assume that during year 4 the tax rate is increased to \(30 \%\) effective as of the beginning of year 4. Repeat

(a) under this assumption.

c. Assume that during year 4 the tax rate is increased to \(30 \%\) effective in year 5 and to \(35 \%\) thereafter. Repeat

(a) under this assumption.

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Past Years Current Year Future Years 1 2 3 4 5 6 7 Equipment Beginning balance 0 $100 $200 $300 Purchases at January 1 100 100 100 100 Retirements at December 31 0 0 0 (100) Ending balance. $100 $200 $300 $300 GAAP depreciation Equipment 1 $ 25 $ 25 $ 25 Equipment 2 25 Equipment 3 222 $ 25 25 25 $25 25 25 25 $25 Equipment 4 25 25 25 $25 Annual total. $25 $ 50 $ 75 $100 $75 $50 $25 Tax depreciation Equipment 1 $ 40 $ 30 $ 20 Equipment 2 40 28 $ 10 30 20 $10 Equipment 3 40 30 20 $10 Equipment 4 40 30 20 $10 Annual total. $ 40 $ 70 $ 90 $100 $60 $30 $10