CFA Level I · CFA Level I Exam · Analysis of Income Taxes
A company buys equipment for 500,000. For financial reporting it depreciates the equipment straight-line over 5 years. For tax purposes it claims 40% of cost in year 1. At the end of year 1, the equipment's carrying amount and tax base, respectively, are closest to:
The carrying amount is 400,000 (500,000 less one year of straight-line depreciation of 100,000) and the tax base is 300,000 (500,000 less a 200,000 tax deduction). The carrying amount exceeds the tax base, creating a taxable temporary difference.
- A400,000 and 300,000Correct
- B400,000 and 500,000
- C300,000 and 400,000
Explanation
Carrying amount = 500,000 − 500,000/5 = 400,000. Tax base = 500,000 − 0.40 × 500,000 = 300,000. Carrying amount exceeds tax base, so a taxable temporary difference of 100,000 arises and a deferred tax liability results. The second option ignores the tax deduction.
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