ACCTG 305-Lauff Corp. purchases a piece of equipment on

  

Lauff Corp. purchases a piece of equipment on 1/01/11 for $200,000. Assume a four year service life with zero residual value for both financial reporting (book) purposes and for tax reporting purposes. The only difference is that Lauff Corp. uses sum of the years’ digits depreciation for tax purposes and uses straight line depreciation for book purposes. In each year 2011, 2012, 2013, and 2014, Lauff reports income before depreciation (for book purposes) and taxable income before depreciation deduction (per the tax returns) of $250,000 each year, and is consistently subjected to a 40% income tax rate.

Required (hint: you may want to reference Exhibit 8.1 in completing this assignment):

1. Determine the amount of depreciation each year for book purposes and tax purposes,
2. For each year-end determine the book value of the machine and the tax basis of the machine,
3. For each year-end determine the “future taxable amount” related to the machine,
4. For each year determine the amount of income tax expense to appear in the income statement,
5. For each year determine the amount of income tax paid to appear in the cash flow statement, and
6. Determine the amount of deferred tax liability that will appear in each year-end balance sheet and show the effects on the accounts and financial statements of recording income tax expense for those periods.