F Distinguish between temp and permanent diff's in pre-tax accting inc. and taxable inc.

Question 1

Permanent difference

Answer 1

its the diff. between taxable income and pretax income that will not reverse in the future. Permanent diff’s don’t create deferrals

Created by assets that are not taxable, revenue that is not deductible, and tax credits that result in a direct reduction of taxes.

• Cause a diff. in effective tax rate and statutory tax rate; the tax rate of the jurisdiciton where the girm operates.
• Effective tax rate is derived from the income statement

effective tax rate = income tax expense / pretax income

Question 2

Temporary Difference

Answer 2

The diff, between the tax base and the carrying value of an A or L that will = in taxable amounts or deductible amounts in the future.

If temp diff. is expected to reverse in the future and the balance sheet item is expected to provide future economic beenefits, a DTA or DTL is created.

Temp diff’s can be ‘taxable temp. diff.s’ that result in expected future taxable income or deductible temporary differences that result in expected future tax deductions.

Ex 241: Depreciable equipment, R&D, accounts recievable, municipal bond interest, customer adcance, warranty liability officerslife insurance, note payable and interest paid.

Temp diff’s leadining to DTL’s can arise from investments in other firms when the parent recognizes earnings from the inv. before dividends are recieved.

Temp. diff = DTA only if the temp diff. is expected to reverse in the future, and sufficient taxable profits are expected to exist when the reversal occurs.