Question

Temporary book tax differences due 0109 6 points for outstanding job,5 points for good/adequate job Exhibit 16-4 lists 4 temporary book tax differences. These differences affected the income statement and tax return that you saw yesterday (exhibit 16-7 and 16-8). Cew Pro duction de (1) Books (Dr) CY (2)-(1) Difference (Favorable) Unfavorable TA Item (Dr) Cr SOOD Depreciation expense Gain on fixed asset disposition Bad debt expense Warranty expense Deferred compensation $(2.400,000 54.000 (165.000) (50,000) (800,000 SCATOLOO) 70,000 (95.000) (410.000) (5 ) 16,000 70.000 170,000 (150.000) 1. What does a temporary difference mean, and how does it differ from a "permanent difference? 2. For each of the differences listed explain the difference in plain English by making up an example. Also explain why it is temporary. See example below Plain English description Why is this temporary Is this difference currently favorable to the taxpayer? Depreciation The equipment is Although tax Yes. The annual depreciated straight-line depreciation is higher depreciation for book purposes, but this year, in future years deduction is higher under accelerated book depreciation will than depreciation depreciation (MACRS) be higher. By its nature, expense. This for tax purposes accelerated results in lower depreciation means that taxable income and depreciation deductions lower taxes actually go down each year paid this year. Gain Bad debt expense Warranty expense Deferred compensation

Answer 1

1). The temporary difference arises when you enter the tax transaction for one year but it's supposed to enter for more than one year. In the temporary difference, deferred tax accounts have been created and closed occasionally. But in a permanent difference deferred tax account never been created.

2).

Particulars	Plain English Description	Why is this temporary	Is this difference currently favorable to the taxpayers?
Gain	Gain on Assets higher as per tax schedule. if company miscalculate his book value of assets less then actual, gain on assets increase in tax data compare to book data	it's permanent in nature	Not favorable It will increase the tax Liability
Bad Debts	Bad Debts Expenses are shown higher in books of accounts compare to tax records	it's permanent in nature	it will cause to increase the tax liability
Warranty Expenses	Warranty Expenses Excess booked in the current year but it's not accepted in tax record	it's temporary in nature, in subsequent year warranty expenses as per tax record will increase as well as tax liability will decrease	it will increase the tax liability of the current year, and reduce subsequent years.
Deferred Compensation	differed compensation in books of accounts is a lower than tax record	it's permanent in nature	it will decrease tax liability of the current year