Question:
Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:
A) Favorable permanent difference.
B) Unfavorable permanent difference.
C) Deductible temporary difference.
D) Taxable temporary difference.
Answer:
The correct answer is C) Deductible Temporal Difference
Explanation:
A deductible temporary difference is a temporary difference that will result in amounts that can be subtracted in the future when determining taxable profit or loss. A temporary difference is the variance between the carrying amount of an asset or liability in the balance sheet and its tax base.
The future tax deduction enabled by the writing off of bad debts creates a future tax benefit and is usually recorded on the balance sheet as a deferred tax asset.
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