PM 1: Basics of the liability method Exercise: classifying permanent/temporary differences Instructions For this exercise, the participants should take a few minutes to read through the facts. The program leaders then will begin explaining the solutions with the participants. Facts Complete the schedule below and be prepared to discuss your rationale for each answer. Some items might be characterized correctly in more than one way. Item Permanent Difference Temporary Difference No Difference Accrued environmental contingent liability Allowance for bad debts Goodwill amortized for tax purposes over 15 years, not amortized for GAAP Separately identifiable intangible assets with an indefinite GAAP life, 15-year amortization for tax Interest on municipal bonds Section 482 transfer pricing adjustment imposed by the IRS during an audit Tax deduction on nonqualified stock options issued to employees Meals and entertainment expenses Pension and OPEB liabilities Book R&D expense capitalized for tax purposes Net operating loss TEI – Introduction to Financial Reporting for Taxes © 2008 Ernst & Young LLP. All rights reserved.