Difference between the book and tax bases of Rosty’s assets at the end of 2001

Tax Expense, Tax Payable, and Deferred Tax Liability:

Effects of Tax Rate Changes

Rosty Co. began operations in 2000. The firm recognized $30 million of depreciation expense on its income statement and reported $50 million as depreciation on its 2000 tax return. The firm’s income was taxed at 30%, and pre-tax income was $25 million.

Required

Determine the following:

a. Tax liability.

b. Deferred tax liability at the end of the year.

c. Difference between the book and tax bases of Rosty’s assets at the end of the year.

d. Income tax expense.

e. During 2001, Rosty Co. recognized an additional $30 million of depreciation expense on its income statement and reported $40 million as depreciation on its tax return. During 2001, the statutory income tax rate applicable to firms such as Rosty Co. increased from 30 to 40%. Pre-tax income in 2001 was $12 million. Determine the following amounts:

i. Difference between the book and tax bases of Rosty’s assets at the end of 2001.

ii. Deferred tax liability at the end of 2001.

iii. Tax liability for 2001.

iv. Income tax expense for 2001.

v. Percentage relationship between pre-tax income and income tax expense reported in the 2001 income statement.