Goldfarb, Inc. uses MACRS for its income tax returns and straight line depreciation for its financial statements. The company purchased 5 year MACRS property on January 1, 2013 that cost $65,000 and has a $5,000 salvage value and an expected 8 year useful life. Given a depreciation percentage of 20% for the first year for 5 year property, the company would show which of the following on its financial records?
A)a deferred tax liability.
B)the same amount of depreciation expense for financial reporting as for income tax preparation.
C)depreciation expense of $13,000 on the income statement and $7,500 on the tax return.
D)less depreciation expense on the tax return than on the income statement.

Question

Quizplus · Accepted Answer

Depreciation on Goldfarb's 2013 income tax return = 20% x $65,000 = $13,000. Using straight-line depreciation, Goldfarb would recognize $7,500 of depreciation expense: ($65,000 - $5,000)/8 years. Because the company will pay less income tax than it will report as income tax expense, it will record a deferred tax liability.