Question

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. Instructions 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) ______ 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) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
(c) ______ Expenses are incurred in obtaining tax-exempt income.
(d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes.
(f) ______ Interest is received on an investment in tax-exempt municipal obligations.
(g) ______ 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.
(h) ______ 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) ______ 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) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are taxdeductible in the period(s) when the related liabilities are settled.
(k) ______ Expenses on stock options are accrued for financial reporting purposes.

Answer 1

Answer:

(a) It involves 2: 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) It involves 1: A landlord collects some rents in advance. Rents received are taxable in the period when they are received.

(c) It involves 3: Expenses are incurred in obtaining tax-exempt income.

(d) It involves 1: Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.

(e) It involves 2: Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes.

(f) It involves 2: Interest is received on an investment in tax-exempt municipal obligations.

(g) It involves 3: 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.

(h) It involves 3: 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) It involves 3: 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) It involves 1: Estimated losses on pending lawsuits and claims are accrued for books. These losses are taxdeductible in the period(s) when the related liabilities are settled.

(k) It involves 1: Expenses on stock options are accrued for financial reporting purposes.

Explanation:

Key;

(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.