Answer:
Staples Corporation
A schedule calculating the increase in income tax liabilities for December 31 across the years 2020, 2021, 2022, and 2023:
Year Pre-tax GAAP Tax- Tax Taxable Income Tax Deferred
GAAP Income able Income Income Payable Expense Liability
(a) (b) (c) 25% 25% (Recovery)
of (c) of (b)
2020 $230,000 $200,000 $110,000 $27,500 $50,000 $22,500
2021 250,000 220,000 250,000 62,500 55,000 (7,500)
2022 240,000 210,000 240,000 60,000 52,500 (7,500)
2023 240,000 210,000 240,000 60,000 52,500 (7,500)
Total $960,000 $840,000 $840,000 $210,000 $210,000 0
Explanation:
a) Data and Calculations:
Cost of the depreciable asset = $120,000
Estimated useful life = 4 years
Residual value = $0
Tax depreciation expense = 100% for 2020
GAAP depreciation expense = 25% for 2020, 2021, 2022, and 2023
Tax rate for each year = 25%
Year Pre-tax GAAP Tax- Tax Taxable Income Tax Deferred
GAAP Income able Income Income Payable Expense Liability
(a) (b) (c) 25% 25% (Recovery)
of (c) of (b)
2020 $230,000 $200,000 $110,000 $27,500 $50,000 $22,500
2021 250,000 220,000 250,000 62,500 55,000 (7,500)
2022 240,000 210,000 240,000 60,000 52,500 (7,500)
2023 240,000 210,000 240,000 60,000 52,500 (7,500)
Total $960,000 $840,000 $840,000 $210,000 $210,000 0
Tax Taxable Income for 2020 = $110,000 ($230,000-$120,000)
GAAP Taxable Income = GAAP minus annual depreciation
b) Tax Taxable Income equals GAAP income of $230,000 less 100% depreciation ($120,000) for the first year and 0% for the following years. This results in temporary differences in 2020 between the calculated tax payable and the tax expense for later years. Although there was a tax obligation established in the first year, it is counterbalanced in the years that follow.
