Accounting for income taxes What would you say? Background The Cordoba Company (Cordoba), a Spanish manufacturer of fine sailing pleasure boats, purchased a fiberglass molding machine on January 1, 2008 for €100,000. The useful life of the molding machine for book purposes is ten years on a straight-line basis. The Spanish tax authorities allow for depreciation over five years on a straight-line basis. The tax rate in Spain is 35%. The book basis, the tax basis, and the balance in the deferred tax liability account of the machine for the first 5 years were as follows: Year Book cost Book accumulated depreciation Book basis Tax cost Tax accumulated depreciation Tax basis Deferred tax liability 2008 €100,000 €10,000 €90,000 €100,000 € 20,000 €80,000 € 3,500 2009 €100,000 €20,000 €80,000 €100,000 € 40,000 €60,000 € 7,000 2010 €100,000 €30,000 €70,000 €100,000 € 60,000 €40,000 €10,500 2011 €100,000 €40,000 €60,000 €100,000 € 80,000 €20,000 €14,000 2012 €100,000 €50,000 €50,000 €100,000 €100,000 € 0 €17,500 Required On December 31, 2010, after recording its year end journal entries, Cordoba receives an offer to sell the fiberglass molding machine to an Italian sailboat company, Vela, for €120,000. Cordoba has a short window to consider their options regarding this machinery as Vela would like to complete the transaction on January 1, 2011. ► Cordoba has asked you to quickly prepare a presentation including supporting schedules (and relevant journal entries) to help explain the tax accounting ramifications for their options under both US GAAP and IFRS. What will you say?
