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) 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 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 tax deductible in the period(s) when the related liabilities are settled.
(k) Expenses on stock options are accrued for financial reporting purposes.
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