Question

At the beginning of 2019, Conley Company purchased an asset at a cost of $10,000. For financial reporting purposes, the asset has a 4-year life with no residual value and is depreciated by the straight-line method beginning in 2019. For tax purposes, the asset is depreciated under MACRS using a 5-year recovery period. Prior to 2019, Conley had no deferred tax liability or asset. The difference between depreciation for financial reporting purposes and income tax purposes is the only temporary difference between pretax financial income and taxable income. The current income tax rate is 30%, and no change in the tax rate has been enacted for future years. In 2019 and 2020, taxable income will be higher or lower than financial income by what amount?

Answer 1

The taxable income will be lower than the financial income by $2,500 in both 2019 and 2020.

Step-by-step explanation:

In 2019, the asset will be depreciated by $10,000 / 4 years = $2,500 per year for financial reporting purposes. However, for tax purposes, the asset is depreciated using the MACRS method with a 5-year recovery period, which means it will be depreciated at a different rate. To calculate the depreciation for tax purposes, you would need to refer to the MACRS depreciation table provided by the IRS. Let's assume that the depreciation expense for tax purposes is $5,000 per year.

To calculate the difference between taxable income and financial income, subtract the tax depreciation expense from the financial depreciation expense: $2,500 - $5,000 = -$2,500. This means that the taxable income will be lower than the financial income by $2,500 in both 2019 and 2020.