In year 1, Lawrence Corp. purchased equipment for $100,000. Lawrence uses straight-line depreciation over a 10-year useful life with no residual value for financial reporting purposes. In year 1, tax depreciation was $14,000. At the end of year 1, the carrying value for accounting purposes is , and the tax basis is .

$90,000 and $86,000

Explanation:

In year 1, Lawrence Corp. purchased equipment for $100,000. Lawrence uses straight-line depreciation over a 10-year useful life with no residual value for financial reporting purposes.

In year 1, tax depreciation was $14,000. At the end of year 1, the carrying value for accounting purposes is $90,000, and the tax basis is $86,000.

Carrying value = Cost - Depreciation to date = 100,000 - (100.000 cost / 10 years) = $90,000

While tax basis = Cost - Tax depreciation = $100,000 - $14,000 = $86,000

Carrying value at Year 1 end = $90,000.

Tax basis at Year 1 end = $86,000.

Explanation:

There is a difference between carrying value and tax basis. Tax basis is the written-down-value at which a tangible fixed asset is reported on the face of balance sheet, if and only if, the financial statements are prepared for Taxation purposes. Whereas, carrying value is the book value at which a tangible fixed asset is recorded on the face of balance sheet when the financial statements are prepared as per the company's policy and IFRSs. The difference between carrying value and tax basis arise due to the different computation of depreciation. The revenue authority requires companies to depreciates asset at a higher rate, it makes tax basis, calculated as Cost less Accumulated Tax Depreciation, lesser than the carrying value, calculated as Cost less Accumulated Depreciation, in the initial years. It is to be noted here that the total amount depreciated over the life of asset will remain the same under both the methods but it is only the temporary difference exists due to time differences.

Calculation

Carrying Value = 100,000 - [100,000 / 10] = $90,000.

Tax Basis = 100,000 - 14,000 = $86,000.