Gamma had pretax accounting income of $1,400 during 2011. Gamma used accelerated depreciation for tax purposes ($1,000) and straight-line depreciation for financial reporting purposes ($200). During 2011, Gamma accrued warranty expenses of $900 and paid cash to honor warranties of $500. Gamma's taxable income for 2011 would be

Question

Quizplus · Accepted Answer

Gamma used accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes. Therefore, Gamma had a tax deduction of $1,000 for depreciation ($1,000/5 years = $200 per year x 5 years = $1,000) and a financial expense of $200 for depreciation.

Gamma accrued warranty expenses of $900, but only paid $500 in cash to honor warranties during the year. Therefore, Gamma can deduct $500 on its tax return ($900 accrued - $500 paid = $400 deduction).

Starting with pretax accounting income of $1,400 and deducting tax depreciation of $1,000 and warranty expenses of $400 gives taxable income of $0.

However, there is one more adjustment needed. Gamma deducted too much depreciation for tax purposes ($1,000) compared to its financial reporting ($200). To correct this, Gamma needs to add back the excess depreciation ($1,000 - $200 = $800) on its tax return, resulting in taxable income of $800.

Therefore, the correct answer is B) $1,000.

Gamma Had Pretax Accounting Income of $1,400 During 2011