CFA Practice Question

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CFA Practice Question

For financial statement purposes, Adel Corporation was depreciating a truck using the straight-line method over five years. For income tax purposes, the truck was being depreciated by an accelerated method over a life of only three years. After two years, the truck was sold at a price above its book value for financial statement purposes. Adel Corporation should report this sale as a gain in its income statement ______.
A. and an even larger gain in its income tax return
B. but as a loss in its income tax return
C. but as a smaller gain in its income tax return

User Contributed Comments 5

User Comment
geet Book value with accelerated is lower under tax purposes...therefor larger gain...
serboc good question
tll936 don't understand why larger gain in income tax return?
dan1987 Carry Value -> straight line for the income statements

Tax Base -> more aggressive accelerated depreciation

Asset Sold for more than Carry Value therefore gain on the statements, since the tax asset value is significantly less than the carry value there is an even bigger gain (Sale Value - Tax asset value) > (Sale value - Carry Value) as Tax asset value < Carry Value

If you plug some numbers into an example it becomes really obvious FYI i got it wrong till I worked an example
schweitzdm Oh now I get this. The gain would be bigger for the tax reporting since it has been being depreciated down to a lower level via accelerated method.
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