For Year 1, Oscar Company records depreciation expense of $12,000 on its income statement and $9,000 of modified accelerated cost recovery system (MACRS)depreciation on its tax return. Which of the following answers is correct regarding the difference between the two figures?
A)Net income is understated by $3,000 on the Year 1 income statement.
B)Deferred taxes of $3,000 are subtracted from taxable income of Year 1.
C)The difference in depreciation expense is caused by differences between generally accepted accounting principles (GAAP)and the tax code.
D)The amount of depreciation recorded on the income tax return must be incorrect.

Question

Quizplus · Accepted Answer

The difference in depreciation expense is caused by differences between generally accepted accounting principles (GAAP) and the tax code. GAAP allows for different methods of depreciation than the tax code, which can result in different expenses being recognized for financial reporting and tax purposes. This difference is commonly referred to as temporary book-tax differences and can result in deferred tax assets or liabilities on the balance sheet. Therefore, options A, B, and D are not correct answers as they do not accurately explain the reason for the difference in depreciation expense.

For Year 1, Oscar Company Records Depreciation Expense of $12,000