For Year 1,the Oscar Company records depreciation expense of $12,000 on its income statement and $9,000 of 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 GAAP and the tax code.
D)The amount of depreciation recorded on the income tax return must be incorrect.

Question

Quizplus · Accepted Answer

MACRS will typically produce a different depreciation expense than any of the GAAP methods of calculating depreciation.It does not mean that net income is understated,it is just that net income for financial reporting is different than net income for tax reporting.Net income is not misstated as a result of the methods used for tax and financial reporting.

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