Question

Gillock, Inc. uses MACRS for its income tax return and the straight-line method for its financial statements. On January 1, Year 1, the company purchased a long-term asset that cost $130,000 and has a $10,000 salvage value and an expected 8-year useful life. MACRS specifies a 5-year life for that asset and a depreciation rate of 20% for the first year of its life. Which of the following would the company show on its financial records? Depreciation expense of $26,000 on the income statement and $15,000 on the tax return Less depreciation expense on the tax return than on the income statement The same amount of depreciation expense for financial reporting as for income tax preparation A deferred tax liability will be reported on the balance sheet Which of the following would be classified as a long-term operational asset?
a) Trademark
b) Accounts receivable
c) Inventory
d) Notes receivable

Answer 1

Answer:

A deferred tax liability will be reported on the balance sheet

b) trademark

as longterm assets refers to those assets that will not become cash within a one-year period

Explanation:

As the accounting makes the depreciaiton of the asset among 8 years

while the MACRS (depreciaiton for tax purposes) does it in 5 years

the company will pay lower income taxes now but, higher in the future

creating a tax liability as the tax relief occurs now.

Calculations:

Account Depreciation Expense

(cost - salvage value )/ useful life =

(130,000 - 10,000)/ 8 years = 8,000

Tax-purpose depreciation expense

130,000 x 20% = 26,000

There is a tax difference of (26,000 - 8,000) x corporate income tax