Income Tax Expense, Tax Payable, and Deferred
Tax Liability: Change in Tax Rates
Selected information from the income statements and tax returns of Buchanan Trading Co. are provided below for 1999 and 2000, the firm’s first two years of operations (dollars in millions):
|
Selected Income |
Selected Income |
|
|
1999 |
2000 |
|
|
Income before depreciation and taxes |
$1000 |
$1100 |
|
Depreciation expense |
400 |
450 |
|
Pre tax income |
600 |
650 |
|
Income tax expense (35%) |
210 |
227.5 |
|
Selected Tax Items |
||
|
1999 |
2000 |
|
|
Income before depreciation and taxes |
$1000 |
$1100 |
|
Depreciation expense |
700 |
800 |
|
Taxable income |
300 |
300 |
|
Income tax payable (35%) |
105 |
105 |
Required
Determine the following amounts:
a. Difference between the tax basis and book basis of Buchanan’s assets at the end of each year.
b. Deferred tax liabilities at the end of each year.
c. In the year 2001, Buchanan Trading Company reported $800 million of depreciation in its income statement and $600 million of depreciation on its tax return. The firm’s income before depreciation and income taxes was $950 million. Enacted income tax rates applicable to firms such as Buchanan were increased to 45% effective at the beginning of the year 2001. Based on this new information, determine Buchanan’s income tax expense and net income after tax reported on its income statement for the year 2001. Calculate the deferred tax liability reported on its balance sheet at December 31, 2001.