Question

A firm acquires an asset for $120,000 at the beginning of year 1. The asset will generate $50,000 of revenues in each year. For financial reporting purposes, the asset will be depreciated straight line to zero over four years. For tax purposes, it will be depreciated straight line to zero over three years. Assume the firm has no other expenses apart from depreciation expense. The tax rate is 40%. Use this information to answer Questions (7) - (12).

11. The carrying value minus the tax base of the asset at the end of year 2 (two) is: A) -$20,000 B) -$4,000 C) +$4,000 D) +$20,000

Answer 1

Solution :-

As per company asset Dep each Year = 120,000 / 4 = $30,000

For taxable Purpose Dep each Year = 120,000 / 3 = $40,000

At the end of Year 2 Carrying Amount = $120,0000 - ( $30,000 * 2 ) = $60,000

At the end of Year 2 Tax base = $120,000 - ( $40,000 * 2 ) = $40,000

Therefore   The carrying value minus the tax base of the asset at the end of year 2 (two) is

= $60,000 -$40,000 = $20,000

Therefore Correct Answer is (D)

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