Hamburg Company recently began business and purchased a large facility to make beach clothing. Hamburg Company managed
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Hamburg Company recently began business and purchased a large facility to make beach clothing. Hamburg Company managed to make a small profit in its initial year of operations, although it has used all its cash to purchase inventory and equipment. After preparing its tax return for the year, Hamburg's managers realized that they could pay less taxes than they thought. Because IRS accelerated depreciation methods allow for higher depreciation expense than the straight-line method the company is using for financial reporting purposes, Hamburg can claim more depreciation expense than they thought they could and can reduce taxable income by $\$ 30,000$. However, Hamburg's managers know that the two depreciation methods will eventually even out and that the difference is only temporary and will create a deferred income tax liability, which must be recorded on the books. Hamburg's management is very conservative, though, and would rather pay the additional taxes now than record a liability that must be paid in the future, even if it means borrowing the money from a bank to pay the extra taxes. They have come to you for advice. What would you tell them?
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