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Topic
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Can someone explain to me why are we taking $20,000 for year 2 and not considering the difference between SL depreciation of $ 12000 and 20000 for year 2?
On January 2, Year 1, Ross Co. purchased a machine for $70,000. This machine has a 5-year useful life, a residual value of $10,000, and is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation expense was $25,000 for Year 1 and $20,000 for Year 2. Ross’ Year 2 income, before income taxes and depreciation expense, was $100,000 and its tax rate was 30%. If Ross had made no estimated tax payments during Year 2, what amount of current income tax liability would Ross report in its December 31, Year 2, balance sheet?
a. $22,500
b. $24,000
c. $26,400
d. $25,800
Explanation
Choice “b” is correct, $24,000. Current income tax liability is based upon taxable income and current tax rates.
Year 2
Income before depreciation and taxes
$ 100,000
Tax depreciation (20,000)
Taxable income 80,000
Tax rate × 30%
Current income tax liability at 12/31/Year 2 $ 24,000
Note: The question involves the second year. This is a common trick used by the examiners. Had you used the first year, you would have arrived at an incorrect answer ($100,000 − 25,000 = 75,000 × 30% = $22,500).
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