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) $86,000, $86,000
B) $100,000, $86,000
C) $86,000, $100,000
D) $100,000, $100,000

Answer 1

Using straight-line depreciation for accounting, the carrying value of Lawrence Corp.'s equipment at the end of year 1 is $90,000, and the tax basis after tax depreciation is $86,000. The correct answer was not provided in the options.

Step-by-step explanation:

To determine the carrying value for accounting purposes of Lawrence Corp.'s equipment at the end of year 1, we apply the straight-line depreciation method. The initial cost of the equipment is $100,000, and it is being depreciated over a 10-year period with no residual value. The yearly depreciation expense for accounting purposes is therefore $100,000 / 10 years = $10,000 per year. Having taken one year of depreciation, the carrying value at the end of year 1 for accounting purposes is $100,000 - $10,000 = $90,000.

For tax purposes, the equipment depreciated $14,000 in the first year. Thus, the tax basis at the end of year 1 is $100,000 - $14,000 = $86,000.

Thus, at the end of year 1, the carrying value for accounting purposes is $90,000, and the tax basis is $86,000. Therefore, the correct answer is not listed among the provided options.