Nowell Company is experimenting with comprehensive liability income tax allocation called for in SFAS No. 109 but, in addition, they are employing discounting. No temporary differences exist up to 2000. Shown here is a schedule of tax depreciation, book depreciation, and income before depreciation.
| Tax Depreciation | Book Depreciation | Income Before Depreciation | |||
| Year | A1 | A2 | A1 | A2 |
|
| 2005 | $50,000 |
| $35,000 |
| $300,000 |
| 2006 | 40,000 | $60,000 | 35,000 | $50,000 | 400,000 |
| 2007 | 30,000 | 50,000 | 35,000 | 50,000 | 420,000 |
| 2008 | 20,000 | 40,000 | 35,000 | 50,000 | 440,000 |
The tax rate is 45 percent. The discount rate is 8 percent.
Required:
Prepare income tax entries for2005, 2006, 2007, and 2008discounting deferred tax liabilities at 8 percent. Why would using discounting be a stronger asset liability orientation than not discounting deferred tax liabilities?
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