Mansfield Corporation purchased a new piece of equipment at the beginning of Year 1 for $1,060,000. The expected life of the asset is 25 years with no residual value. The company uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes (the accelerated method results in $106,000 of depreciation each year). The company's federal income tax rate is 21%. The company determined its income tax obligations for Year 1 and Year 2 were $405,000 and $640,000, respectively.

1) Compute the deferred income tax amount reported on the balance sheet for each year.

2) Is the deferred income tax a liability or an asset?

3)Compute income tax expense for each year.

1)

deferred income tax (liaiblity)

Year 1 $ 13,356

Year 2 $ 26,712

Income tax Liability: as in the future it will pay higher taxes because is paying lower now.

Income tax expense:

Year 1: 418,356‬

Year 2: 653,356

Explanation:

The straight line depreciation will be:

Depreciation 42,400

Now, we solve for the difference:

42,400 - 106,000 = -63,600

The income will differ by 63600

and tax will be 63,600 x 0.21 = 13,356

the income tax expense will be calculated on the income according to accounting

the income tax payable according to the deferred tax liabilities and assets.

as we are given with the obligation (payable) we have to add the temporary difference to compute the income tax expense

405,000 + 13,356 = 418,356‬

640,000 + 13,356 = 653,356

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