For Year 1, Oscar Company Records Depreciation Expense of $12,000

Multiple Choice

For Year 1, Oscar Company records depreciation expense of $12,000 on its income statement and $9,000 of modified accelerated cost recovery system (MACRS) depreciation on its tax return. Which of the following answers is correct regarding the difference between the two figures?

A) Net income is understated by $3,000 on the Year 1 income statement.
B) Deferred taxes of $3,000 are subtracted from taxable income of Year 1.
C) The difference in depreciation expense is caused by differences between generally accepted accounting principles (GAAP) and the tax code.
D) The amount of depreciation recorded on the income tax return must be incorrect.