Spitzer Corporation manufactures supplies for dry cleaning services. On October 1, 2017, it purchased a new machine at a cost of $10 million. For financial reporting purposes, it depreciates the machine over its expected useful life of 20 years on a straight-line basis with no salvage value. Because of the timing of the purchase, depreciation is taken for one-fourth of a year in 2017.For tax purposes, the machine qualifies as "10-year property." For 10-year property, depreciation rates (all as a percentage of the initial investment) are 10% in the year the property was acquired, 18% the next year, then 14.4%, 11.52%, 9.22%, 7.37%, 6.55%, 6.55%, 6.56%, 6.55%, 3.28%. Note that depreciation of 10% is taken for tax purposes in the year of acquisition regardless of when during the year the

Question

asset was acquired.Ignore any deferred tax items that arise from any other sources. Assume a 40% tax rate. Required:
What is the amount of Spitzer's depreciation expense for financial reporting purposes in 2017? What is the amount of Spitzer's depreciation expense for tax purposes in 2017? 
What is the amount of Spitzer's depreciation expense for financial reporting purposes in 2018? 
What is the amount of Spitzer's depreciation expense for tax purposes in 2018? 
Determine whether Spitzer has a deferred tax asset or a deferred tax liability as of December 31, 2017. What is the balance of this item at December 31, 2017? 
What is the amount of Spitzer's deferred tax asset or deferred tax liability as of December 31, 2018? 
What is the amount of the deferred portion of Spitzer's 2018 income tax expense? 

What will be an ideal response?

Answer 1

a) $10 million / 20 × 0.25 = $125,000.
b) $10 million × 10% = $1,000,000.
c) $10 million / 20 = $500,000.
d) $10 million × 18% = $1,800,000.
e) Cumulative temporary difference = $1,000,000 - $125,000 = $875,000. 
Deferred tax liability = $875,000 × 40% = $350,000.
f) Cumulative temporary difference = ($1,000,000 +$1,800,000) - ($125,000 + $500,000) = $2,175,000.  Deferred tax liability = $2,175,000 × 40% = $870,000.
g) Deferred portion of 2018 income tax expense = increase in deferred tax liability = $870,000 - $350,000 = $520,000.