The Marlena Group uses straight- line depreciation for financial reporting purposes and accelerated depreciation on its tax returns. The company reported $ 40,000 in income before tax and depreciation for book purposes. The equipment has an original cost of $ 20,000. Straight- line depreciation is $ 2,000 while accelerated depreciation amounts to $ 6,000 for the asset’s first year of utilization. There are no other book- tax differences.
a. What is the book basis of the equipment at the end of the first year?
b. What is the tax basis of the equipment at the end of the first year?
c. Compute the deferred tax liability, income tax payable, and income tax expense for the current year assuming that Marlena is subject to a 40% tax rate.