On January 1, 2020, your trucking company buys a new truck for $100,000. For book purposes, it has a useful life of 4 years with no salvage value. For tax purposes, it has a useful life of 2 years with no salvage value. Your company uses straight line depreciation for book purposes. For tax purposes, it takes $50,000 depreciation in year one and $50,000 depreciation in year two.

A. Assume that for both book and tax purposes, for the year ended December 31, 2020, the company had profit before taxes and depreciation $100,000. Also, assume a 20% tax rate for both book and tax purposes.

(1) What is the companys profit before tax for book purposes for 2020?

(2) What is the companys profit before tax for tax purposes for 2020?

(3) How much will the company recognize as tax expense for book purposes for 2020?

(4) How much will the company have to pay as tax expense for tax purposes for 2020?

(5) Record the companys recognition of taxes (use T-accounts if you like) for book purposes as it affects its income statement and balance sheet for 2020.

B. Will the effect of the difference between book and tax accounting for depreciation of the machine reverse? Why? If not, why not? If so, in what year (1, 2, 3 or 4) will the reversal begin?

C. It is January 1, 2024, what is the value of the truck for:

(1) Book purposes?

(2) Tax purposes?

(3) On January 1, 2024, you sell the truck and receive $10,000. Assume a tax rate of 20%, for book purposes what will be the effect on your companys income statement, balance sheet and cash flow statement? Please show any calculations to support your answer.

D. Assume a 20% tax rate. Independent of your answers to Questions B and C, assume at the beginning of Year 3 (January 1, 2022), for book purposes, you believe that the machine will last a total of 6 years, two years longer than you previously thought. What will book depreci-ation be in years 3, 4, 5 and 6? Will there be any effect on cash flow? Why or why not? Will it effect tax accounting? Why or why not? Please show any calculations to support your answer.