Effect of temporary differences on income taxes. Woodward Corporation purchases a new machine for $50,000 on January 1, 2008. The machine has a four-year estimated service life and an estimated salvage value of zero. After paying the cost of running and maintaining the machine, the firm enjoys a $25,000-per-year excess of revenue over expenses (except depreciation and taxes). In addition to the $25,000 from the machine, other pretax income each year is $35,000. Woodward uses straight-line depreciation for financial reporting and depreciates the machine for tax reporting using the following percentages: 33% in the first year, 44% in the second, 15% in the third, and 8% in the fourth. Depreciation is Woodward’s only temporary differences. Woodward pays combined federal and local income taxes at a rate of 40% of taxable income.
(a) Compute the amount of income taxes currently payable for each of the four years.
(b) Compute the carrying value of the machine for financial reporting and the tax basis of the machine for tax reporting at the end of each of the four years. The tax basis is the amortized cost for income tax purposes.
(c) Compute the amount of income tax expense for each of the four years.
(d) Give the journal entries to record income tax expense and income tax payable for 2008 through 2011.