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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Several years ago, PTR purchased business equipment for $50,000. PTR’s
accumulated book depreciation with respect to the equipment is $37,200, and its
accumulated tax depreciation is $41,000.
Required:
a.Compute PTR’s book and tax basis in the equipment.
b. Using a 21 percent tax rate, compute PTR’s deferred tax asset or liability (identify
which) resulting from the difference between accumulated book and tax
depreciation.
c. Compute PTR’s book and tax gain if it sells the equipment for $14,750.

Expert Solution

Step 1

\begin{matrix} \begin{aligned} Book basis & = $ 50,000 - $ 37,200 \\ = $ 12, 800 \end{aligned} \end{matrix}

\begin{matrix} \begin{aligned} Tax basis & = $ 50,000 - $ 41,000 \\ = $ 9, 000 \end{aligned} \end{matrix}

b).

\begin{matrix} \begin{aligned} Difference between book and tax depreciation & = $ 41,000 - $ 37,200 \\ = $ 3, 800 \end{aligned} \end{matrix}

c).

\begin{matrix} \begin{aligned} Book gain & = $ 14,750 - $ 12,800 \\ = $ 1, 950 \end{aligned} \end{matrix}

\begin{matrix} \begin{aligned} Tax gain & = $ 14,750 - $ 9,000 \\ = $ 5, 750 \end{aligned} \end{matrix}

	Amount
Book gain	$1,950
Tax gain	$5,750

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