In 2010, Its First Year of Operations, Bandera Corporation Reported

question 55

Multiple Choice

In 2010, its first year of operations, Bandera Corporation reported pretax financial income of $80, 000 for the year ended December 31.Bandera depreciates its fixed assets using an accelerated cost recovery method for tax purposes and straight-line depreciation for financial reporting.On assets acquired in 2010, the following are differences between depreciation on the tax return and accounting income during the asset's five-year life: $\begin{array}{lll} & \text {Tax Depreciation in Excess}& \text { Enacted}\\& \text { of Book- Denreciation}& \text {Tax Rata} \\ 2010 & \$ 18,000 &30 \% \\2011 & 10,000 &30 \% \\2012 & 2,000 & 35 \% \\2013 & (13,000) & 35 \% \\2014 & (17,000) & 40 \% \\\end{array}$
Assuming no other temporary or permanent differences, Bandera's December 31, 2010 balance sheet should include
$$\begin{array}{l}&\text {Noncurent Deferred}&\text {Income Taxes}\\&\text {Income Tax Liability}&\text {Payable}\\\text {I. }&\$ 5,400 & \$ 18,600 \\\text {II.}&\$ 7,650 & \$ 18,600 \\\text {III.}&\$ 7,650 & \$ 79,400 \\\text {IV.}&\$ 5,400 & \$ 74,000\end{array}$$

• A)I
• B)II
• C)III
• D)IV

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Definitions:

FIFO Approach

A method of inventory valuation where the first items put into inventory are the first ones to be recorded as sold.

Sum-Of-The-Years'-Digits Method

A depreciation technique that results in a more accelerated write-off of an asset over its useful life, by applying a decreasing fraction to its depreciable cost.

Repairs

Expenditures that restore an asset to its previous operating condition or maintain the asset in its current condition, without significantly enhancing its value.

Maintenance Costs

The expenses incurred to keep an asset in usable condition or restore it to its original condition without enhancing its value.