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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Permanent and Temporary Differences

To implement interperiod income tax allocation, an accountant must be able to distinguish between permanent and temporary differences. The following is a list of three differences between a corporation’s pretax financial income and taxable income:

  1. a. Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but are deducted for tax purposes when incurred.
  2. b. MACRS depreciation for income tax purposes exceeds straight-line depreciation for financial reporting purposes.
  3. c. Percentage depletion for tax purposes exceeds cost depletion for financial reporting purposes.

Required:

  1. 1. Define (a) permanent difference and (b) temporary difference.
  2. 2. Define interperiod income tax allocation and briefly describe its application under generally accepted accounting principles.
  3. 3. Indicate and explain whether each of the three differences listed in this case should be treated as a temporary or permanent difference.

1 (a)

To determine

Explain the term permanent difference.

Explanation

Permanent difference: Permanent difference refers to those differences that ae caused by transactions and e...

1 (b)

To determine

Explain the term temporary difference.

2.

To determine

Explain inter period income tax allocation and its application under generally accepted accounting principles.

3.

To determine

Identify and describe whether each of the three listed differences should be treated as temporary or permanent difference.

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