Required: For each of these scenarios described below, answer the following ques

Question

Required: For each of these scenarios described below, answer the following question:

4. How is the tax basis of the balance sheet asset or liability account calculated and why does it differ from the book basis of the asset or liability account?

Scenario 1: X was incorporated and began business this year, for tax purposes, it capitalized organization costs which are amortizable over 15 years. For book purposes, the organization costs were expensed.

Scenario 2: On 31 December, X received an advance payment of two years of rental income from a tenant in one of its commercial buildings. For book purposes, the payment was recorded as unearned revenue and will be reported as income when earned over the next two years.

Explanation / Answer

As per ASC 740, a temporary difference is the difference between the tax base of an asset or liability and its reported amount in the financial statements. Tax base of an asset/liability is the amount that is considered in the tax books of the company for the purposes of computing the amounts deductible or taxable, as the case may be, from the net income of the company as reported in its financial statements. The amount that needs to be deducted or taxed is determined based on the income tax regulations that have been enacted in the respective territory. Scenario 1: The tax base of the organisation cost is an asset amounting to 14/15th of the total cost as at the end of year 1, as only 1/15th of the cost has been amortised in the current period The book base for organisation cost is "0" as at the end of year 1, as the entire cost has been charged to the income statement during the year. Scenario 2: Advance payments are treated in the same manner in accounting books and in tax books and hence the tax base and the book base of the liability remains the same.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.