[Anonymous]

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).

[LKD CPA]

albo – You wouldn't have to figure the difference between what was depreciated during the year from straight line because it says “Ross' Year 2 income, before income taxes and depreciation expense, was $100,000”. The $100,000 does NOT include depreciated expense from the SL method that was taken during the year. Therefore you have to use the entire amount of the taxable depreciation.

FAR: 74, 83
REG: 76
BEC: 77
AUD: 89

[Author]

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