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?
A)Less depreciation expense on the tax return than on the income statement
B)The same amount of depreciation expense for financial reporting as for income tax preparation
C)Depreciation expense of $26,000 on the income statement and $15,000 on the tax return
D)A deferred tax liability will be reported on the balance sheet

Question

Quizplus · Accepted Answer

Depreciation deduction on Year 1 income tax return = 20% × $130,000 = $26,000
Straight-line method depreciation = ($130,000 - $10,000)÷ 8 years = $15,000
Taxes will be reduced in Year 1 because the MACRS depreciation charge is higher than the straight-line amount.The amount of taxes delayed for future payment represents a deferred tax liability that will be reported on the balance sheet.