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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 11.1) Why might depreciation on a company’s financial statements be different from depreciation the company computed for income tax purposes?

To determine

State the reason for the difference between the deprecation reported for the income tax purpose and the depreciation of a company’s financial statement.

Explanation

Accelerated depreciation method: This depreciation method allows to record higher depreciation expense in the early years of the useful life of the asset, thereby, reducing the book value of the asset at a faster rate.

Depreciation: Depreciation is a method of reducing the capitalized cost of long-lived operating assets or plant assets for the period the asset is used.

The deprecation of a company’s financial statement differs from the deprecation computed for the tax purposes because the fundamental purposes behind depreciation are different and each method is unique. The income tax laws’ purpose is to stimulate capital investment through the rapid recovery of capital costs. On the other hand, the financial income purpose is to present fairly the activities of a company over a particular period...

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