Deferred T ax Calculations (Appendix) Clemente Inc. has reported income for book purposes as follows for the past three years:

Clemente has identified two items that are treated differently in the financial records and in the tax records. The first one is interest income on municipal bonds, which is recognized on the financial reports to the extent of $5,000 each year but does not show up as a revenue item on the company€™s tax return. The other item, equipment, is depreciated using the straight-line method at the rate of $20,000 each year for financial accounting but is depreciated for tax purposes at the rate of $30,000 in Year 1, $20,000 in Year 2, and $10,000 in Year 3.

Required
1. Determine the amount of cash that Clemente paid for income taxes each year. Assume that a 40% tax rate applies to all three years.
2. Calculate the balance in the Deferred Tax account at the end of Years 1, 2, and
3. How does this account appear on the balance sheet?

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(In thousands) Year 1 Year 2 Year 3 Income before taxes $120 $120 $120