At the beginning of 2010, Maritime Manufacturing Company acquired a capital asset costing $500,000 that was expected to have a residual value of approximately $50,000 at the end of its productive life. The company decided to depreciate it using the production method, which resulted in depreciation expense of $70,000 in 2010 and $60,000 in 2011. For tax purposes, a capital cost allowance rate of 20% was applicable to this asset. In 2010, the company had earnings before depreciation and tax of $400,000. The income tax rate was 45%.
Required:
a. Calculate the amount of income tax payable for 2010.
b. What is the balance in the deferred income taxes account at the end of 2010? Be sure to specify whether it is an asset or a liability.
c. Explain briefly what this balance (in the deferred income taxes account) represents.
d. Calculate the amount of income tax expense for the company in 2010.
e. What amount of capital cost allowance can be deducted in 2011?
f. By what amount will the deferred income taxes account change during 2011?
g. What will be the balance in the deferred income taxes account at the end of 2011? Again, be sure to specify whether it will be an asset or a liability.
h. Explain briefly how the balance in the deferred income taxes account is related to the asset's carrying values (i.e., the net book value for accounting purposes and the undepreciated capital cost for tax purposes).