- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 23. Long-lived Assets
- Subject 6. Derecognition
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. |