CFA CFA Level 1 Carrying Amount Vs. Tax Base

Carrying Amount Vs. Tax Base

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    • Avatar of PrestigeWorldWidePrestigeWorldWide
        • CFA Level 1

        In the below question it is my understanding that the Carrying Amount would be the entire amount of the expense, and the Tax base would be the entire amount / 3. Therefore Carrying Amount > Tax Base, and a deferred tax liability is recognized. Can someone help me understand where my line of thinking went wrong? Thanks.

        On the financial statements, a company recognizes the entire amount of an expense in the year it was incurred. However, for tax purposes the expense is capitalized and written-off over 3 years. This will most likely result in:

        1. A deferred tax asset.

        2. A deferred tax liability.

        3. Neither a deferred tax asset nor a deferred tax liability.

        Answer: A

        The carrying value of the asset will be lower than its tax base. Therefore, a deferred tax asset will arise.

      • Avatar of MJB91MJB91
          • CFA Level 2

          Because the inventory has been expensed it will be taxable on the income statement. As for tax purposes it has been capitalized it will not be subject to the same levels of tax within the first year. This will create deferred tax asset as you have paid tax in year 1 due to expensing. Does that make sense?

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