At the beginning of 2013, Pitman Co. purchased an asset for $900,000 with an estimated useful life of 5 years and an estimated salvage value of $75,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2013 and all future years.
1. At the end of 2013, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. $660,000 $465,000
b. $735,000 $465,000
c. $735,000 $540,000
d. $660,000 $540,000
And, At the end of 2013, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet?
a. Deferred tax asset $78,000
b. Deferred tax liability $78,000
c. Deferred tax asset $117,000
d. Deferred tax liability $117,000
1) Book basis: In order to calculate the book basis, you need to subtract the residual value and then divide that amount by the useful life. That's your annual depreciation you reduce from the full $900,000 purchase price.
Pitman Co accounting is examined for purchasing assets.