A Company's Only Temporary Difference Results from Using Double Declining

question 16

Multiple Choice

A company's only temporary difference results from using double declining balance depreciation for tax purposes and straight-line depreciation for financial reporting. The company purchases new plant assets each year. If currently enacted tax law will result in a higher tax rate for all future tax years, which accounting approach for deferred taxes will result in the lowest net income for this current year?

• A) Nonallocation of deferred taxes.
• B) Partial allocation of deferred taxes under the asset/liability method.
• C) Comprehensive allocation of deferred taxes under the asset/liability method.
• D) Comprehensive allocation of deferred taxes under the deferred method.

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Definitions:

AMT Rate

The percentage at which the Alternative Minimum Tax is levied on income, designed to ensure that individuals pay a minimum amount of tax.

Subchapter S Corporation

A form of corporation that meets specific Internal Revenue Code requirements, offering the benefits of incorporated status while being taxed as a partnership.

Stockholder Basis

The amount of a stockholder's investment in a company, used to determine capital gains or losses for tax purposes.

Capital Contributions

Investments of cash or other assets made by owners or partners into a business, increasing the equity of the company.