ACY Limited (“ACY”) started its operation in January 2020. ACY reported a pretax financial income of $500,000 and $600,000 in 2020 and 2021, respectively. In 2020, ACY incurred a penalty expense of $10,000 (2021: $Nil). The penalty is not deductible for tax purposes. On 1 January 2021, ACY purchased a piece of special equipment for operation use. The equipment has a cost of $30,000, a useful life of 5 years, and no residual value. For financial reporting purposes, ACY records an annual depreciation expense of $6,000 each year from 2021 to 2025. For tax purposes, the applicable tax laws allow a 100% tax deduction for the equipment’s cost in the year of purchase. Except for the penalty expense and the depreciation of the equipment, there is no other permanent or temporary difference in both 2020 and 2021. The enacted tax rate is 20%. Each financial year ends on 31 December.

Requirement:

A.1 Calculate the taxable income in 2020 and in 2021, respectively. 

A.2 Discuss whether the difference in the depreciation expense for financial reporting and for tax purposes will create a deferred tax asset, a deferred tax liability, or neither in 2021? Support your argument with calculations. 

A.3 Prepare the journal entries to record income taxes for 2020 and 2021, respectively.