CFA Level I · CFA Level I Exam · Analysis of Income Taxes
A company's depreciation for accounting is 80,000 while tax depreciation is 120,000. Pre-tax accounting profit is 400,000 and the tax rate is 25%. Taxable income and income tax payable are most likely:
Taxable income is 360,000 because tax depreciation exceeds accounting depreciation by 40,000, lowering taxable income below accounting profit. At 25%, income tax payable is 90,000. The difference is temporary and creates a deferred tax liability.
- ATaxable income 360,000; tax payable 90,000Correct
- BTaxable income 440,000; tax payable 110,000
- CTaxable income 360,000; tax payable 100,000
Explanation
Higher tax depreciation reduces taxable income: 400,000 − (120,000 − 80,000) = 360,000. Tax payable = 360,000 × 25% = 90,000. The second option adds the difference instead of subtracting it. The third applies the rate to accounting profit-based figures inconsistently.
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