Question

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.

For each item below, indicate whether it involves:

(1)		A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2)		A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3)		A permanent difference.

Use the appropriate number to indicate your answer for each.

(a)		123		The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
(b)		123		A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
(c)		123		Expenses are incurred in obtaining tax-exempt income.
(d)		123		Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e)		123		Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
(f)		123		For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets’ lives are shorter for tax purposes.
(g)		123		Interest is received on an investment in tax-exempt municipal obligations.
(h)		123		Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
(i)		123		The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
(j)		123		Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
(k)		123		Expenses on stock options are accrued for financial reporting purposes.

Answer 1

The correct answers should be:

Transaction Correct Option The MACRS depreciation system is used for tax purposes, and the A temporary difference that will result in future taxable amounts and, (a) straight-line depreciation method is used for financial reporting therefore, will usually give rise to a deferred income tax liability. purposes for some plant assets. A landlord collects some rents in advance. Rents received are taxable A temporary difference that will result in future deductible amounts and, in the period when they are received. therefore, will usually give rise to a deferred income tax asset. (c) Expenses are incurred in obtaining tax-exempt income. A permanent difference. Costs of guarantees and warranties are estimated and accrued for A temporary difference that will result in future deductible amounts and, financial reporting purposes. therefore, will usually give rise to a deferred income tax asset. Installment sales of investments are accounted for by the accrual A temporary difference that will result in future taxable amounts and, (e) method for financial reporting purposes and the installment method therefore, will usually give rise to a deferred income tax liability. for tax purposes. For some assets, straight-line depreciation is used for both financial A temporary difference that will result in future taxable amounts and, (f) reporting purposes and tax purposes, but the assets' lives are shorter therefore, will usually give rise to a deferred income tax liability. for tax purposes. (6) Interest is received on an investment in tax-exempt municipal A permanent difference. ... Proceeds are received from a life insurance company because of the A permanent difference. death of a key officer. (The company carries a policy on key officers.) The tax return reports a deduction for 80% of the dividends received (i) from U.S. corporations. The cost method is used in accounting for the A permanent difference. related investments for financial reporting purposes. Estimated losses on pending lawsuits and claims are accrued for A temporary difference that will result in future deductible amounts and, () books. These losses are tax deductible in the period(s) when the related liabilities are settled. therefore, will usually give rise to a deferred income tax asset. Expenses on stock options are accrued for financial reporting A temporary difference that will result in future deductible amounts and, purposes. therefore, will usually give rise to a deferred income tax asset.

Notes

Deferred tax assets and liabilities are temporary items which help a company decrease or increase its taxable income leading to a decrease or increase in tax liability.

Permanent difference arises when a transaction was booked differently under tax laws and financial reporting methods and the difference will continue to stay in the 2 set of financial statements and would never ever reversed.

Please comment in case of any issue and I will be happy to help.