Response to the following problem:
Nowell Company is experimenting with comprehensive-liability income tax allocation called for in SFAS No. 109 but, in addition, they are employing discounting. No temporary differences exist up to 2000. Shown here is a schedule of tax depreciation, book depreciation, and income before depreciation.
| Tax Depreciation |
Book Depreciation |
Income Before Depreciation |
|
|
|
| Year |
A1 |
A2
|
A1 |
A2 |
|
|
2005
|
$50,000
|
|
$35,000
|
|
$300,000
|
|
2006
|
40,000
|
$60,000
|
35,000
|
$50,000
|
400,000
|
|
2007
|
30,000
|
50,000
|
35,000
|
50,000
|
420,000
|
|
2008
|
20,000
|
40,000
|
35,000
|
50,000
|
440,000
|
The tax rate is 45 percent. The discount rate is 8 percent.
Required:
Prepare income tax entries for 2005, 2006, 2007, and 2008 discounting deferred tax liabilities at 8 percent. Why would using discounting be a stronger asset-liability orientation than not discounting deferred tax liabilities?