Indicate and explain whether each of the following independent situations should
ID: 2422266 • Letter: I
Question
Indicate and explain whether each of the following independent situations should be treated as a temporary difference or a permanent difference.
(a) For accounting purposes, a company reports revenue from installment sales on the accrual basis. For income tax purposes, it reports the revenues by the installment method, deferring recognition of gross profit until cash is collected.
(b) Pretax accounting income and taxable income differ because 80% of dividends received from U.S. corporations was deducted from taxable income, while 100% of the dividends received was reported for financial statement purposes.
(c) Estimated warranty costs (covering a three-year warranty) are expensed for accounting purposes at the time of sale but deducted for income tax purposes when paid.
Explanation / Answer
(a) In this case the difference is temporaray difference. Defferred tax liability will arise when the company will report the installment amount of sales as revenue. the revenue will be taxable at the time when cash is actually collected and deffered tax liability is cancelled.
(b) It is the case of permanent difference. As the deduction is available which is not reverrsible in future.
(c) It is the case of temporary difference. Differed asset will be created when sale is done which will be reversed when the expense will be paid.