Question

An asset or liability's original value for tax purposes reduced by any amounts included to date on tax returns is referred to as the:

a) Book value
b) Tax basis
c) Historic cost

Answer 1

The term 'tax basis' refers to the original value of an asset or liability for tax purposes, adjusted for tax returns, and is key in understanding the financial health represented in a bank's balance sheet. The correct option is B.

Step-by-step explanation:

The original value of an asset or liability for tax purposes, reduced by any amounts included on tax returns to date, is referred to as the tax basis. This concept is essential in understanding a bank's balance sheet, as it helps determine the gain or loss for tax purposes when an asset is sold. It is different from book value, which is an accounting term reflecting the asset's value on the company's books, taking into account depreciation and amortization.

The historic cost is the original purchase price of the asset, and may differ significantly from its tax basis due to adjustments over time for tax purposes. Banks, like any other firm, maintain balance sheets that include their financial instruments as assets and owe to depositors and other creditors as liabilities, with the difference representing the net worth or bank capital.