Reference no: EM132827987

Problem 1: Fly Inc. depreciates its machinery using a capital allowance for income tax reporting and the straight-line method for financial statement reporting. For the 2001 year, depreciation of machinery amounted to $650,000 under the capital allowance and $435,000 under the straight-line method. This temporary difference will reverse over the next 2 years, with straight-line being greater by $90,000 and $125,000 in 2002 and 2003, respectively. Taxable income in 2001 was $40,000. Income tax rates are 40% in 2001, 35% in 2002, and 30% in 2003. Fly uses liability method to account for deferred tax items. Assume that there will be sufficient income in each future year to realize any taxable amount, what amount should be reported as deferred tax liability at December 31, 2001?