Question

In year 1, Lawrence Corp. purchased equipment for $100,000. Lawrence uses straight-line depreciation over a 10-year useful life with no residual value for financial reporting purposes. In year 1, tax depreciation was $14,000. At the end of year 1, the carrying value for accounting purposes is _____, and the tax basis is____.

a) $100,000; $14,000

b) $86,000; $14,000

c) $100,000; $86,000

d) $86,000; $86,000

Answer 1

At the end of year 1, Lawrence Corp.'s equipment has a carrying value for accounting purposes of $90,000 after accounting for straight-line depreciation, and a tax basis of $86,000 after subtracting the tax depreciation.

Step-by-step explanation:

To compute the carrying value for accounting purposes, one would subtract the depreciation expense recognized during the year from the original cost of the equipment. Lawrence Corp. uses straight-line depreciation over a 10-year useful life, which results in an annual depreciation expense of $10,000 ($100,000/10 years). Therefore, at the end of year 1, the carrying value is $90,000 ($100,000 original cost - $10,000 annual depreciation).

For the tax basis, since tax depreciation was $14,000 in year 1, this is the amount that would reduce the original cost for tax purposes. Thus, at the end of year 1, the tax basis of the equipment is $86,000 ($100,000 original cost - $14,000 tax depreciation).
Carrying value for accounting purposes: $90,000
Tax basis: $86,000