Fox Corporation purchased a machine on January 1 of Year 1 that cost $40,000. The machine had an estimated service life of five years and no residual value. Fox uses straight-line depreciation for accounting purposes and accelerated depreciation for the income tax return as follows: Year 1, 30%; Year 2, 25%; Year 3, 20%; Year 4, 15%; and Year 5, 10%. Taxable income on the tax return for Year 1 was $150,000. The Year 1 income statement also showed a $15,000 expense for premiums paid for life insurance policies on company executive officers. The income tax rate is 25% in Year 1 and 35% in all subsequent years. Accelerated Tax Depreciation Immediate Expensing for Tax Depreciation a. Prepare a schedule to determine deferred tax balances on December 31 of Year 1 through Year 5. Note: Do not use negative signs with your answers. Equipment, Net Year 1 Year 2 Year 3 Year 4 Year 5 GAAP basis $ 64,000 x $ Tax basis 56,000 x Difference between GAAP and tax bases Tax rate $ 8,000 * $ 35% 48,000 x $ 36,000 x 12,000 x $ 35% Deferred tax liability, ending balance 2,800 x $ 4,200 * $ 32,000 x $ 20,000 x 12,000 x $ 35% 4,200 x $ 16,000 * $ 0 8,000 x 0 8,000 x $ 0 35% 35% 2,800 x $ 0 b. Record the income tax journal entry on December 31 of Year 1. Date Account Name Dec. 31, Year 1 Income Tax Expense Check Deferred Tax Liability Income Tax Payable To record income tax. Dr. Cr. 77,800 0 x 0 2,800 x 0 75,000 x Accelerated Tax Depreciation Immediate Expensing for Tax Depreciation c. Repeat requirements a and b assuming instead that the machine is 100% expensed in Year 1 for tax purposes. a. Prepare a schedule to determine deferred tax balances on December 31 of Year 1 through Year 5 Note: Do not use negative signs with your answers. Equipment, Net Year 1 Year 2 Year 3 Year 4 Year 5 GAAP basis $ Tax basis Difference between GAAP and tax bases Tax rate Deferred tax liability, ending balance 64,000 x $ 0 64,000 x 35% 22,400 x $ 48,000 x $ 32,000 x $ 16,000 x $ 0 32,000 x 35% 11,200 x $ 32,000 x 0 16,000 x 0 0 35% 11,200 x $ 35% 5,600 x $ 135% 0 b. Record the income tax journal entry on December 31 of Year 1. Date Account Name Dec. 31, Year 1 Income Tax Expense Deferred Tax Liability Income Tax Payable To record income tax. Dr. Cr. 83,400 0 x 0 22,400 x 0 61,000 x