Exercise 16-7
Listed below are 10 causes of temporary differences. For each temporary
difference, indicate the balance sheet account for which the situation
creates a temporary difference. I’m going to include the resulting
deferred tax account as well.
A future deductible amount occurs when the taxable income exceeds the
pretax accounting income. As a result, the taxes payable exceed the
tax expense, creating a deferred tax asset. The balance sheet item
giving rise to the deferred tax asset is a liability (or contra asset)
A future taxable amount occurs when the taxable income is less than the
pretax accounting income. As a result, the taxes payable will be less
than the tax expense, creating a deferred tax liability. The balance
sheet item giving rise to the deferred tax liability is an asset.
©Dr. Chula King
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Exercise 16-7 (continued)
1. Accrual of loss contingency, tax-deductible when paid. The taxable
income will be greater than the pretax accounting income, creating a
deferred tax asset. The balance sheet account is a liability – loss
contingency.
2 Newspaper subscriptions; taxable when received
2.
received, recognized for
financial reporting when earned. The taxable income will be greater
than the pretax accounting income, creating a deferred tax asset. The
balance sheet account is a liability – unearned subscription revenue.
3. Prepaid rent, tax-deductible when paid. This would be expensed for
accounting purposes later, when incurred. As a result, the taxable
income will be less than the pretax accounting income, creating a
deferred tax liability. The balance sheet account is an asset – prepaid
rent.
©Dr. Chula King
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Exercise 16-7 (continued)
4. Accrued bond interest, tax deductible when paid. This would be
expensed for tax purposes later, when paid. As a result, the taxable
income will be greater than the pretax accounting income, creating a
deferred tax asset. The balance sheet account is a liability – interest
payable.
payable
5. Prepaid insurance, tax deductible when paid. This would be expensed
for accounting purposes later, when incurred. As a result, the taxable
income will be less than the pretax accounting income, creating a
deferred tax liability. The balance sheet account is an asset – prepaid
insurance.
6. Unrealized loss from recording investments at fair value (taxdeductible when investments are sold.) This would reduce accounting
income first. As a result, the taxable income would be greater than the
pretax accounting income, creating a deferred tax asset. This would
create a contra asset (CR) – fair value adjustment.
©Dr. Chula King
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Exercise 16-7 (continued)
7. Warranty expense; estimated for financial reporting when products are
sold; deducted for tax purposes when paid. This would be expensed for
tax purposes later, when paid. As a result, the taxable income will be
greater than the pretax accounting income, creating a deferred tax
asset The balance sheet account is a liability – warranty payable.
asset.
payable
8. Advance rent receipts on an operating lease (as the lessor), taxable
when received. This would be included in taxable income before it is
included in pretax accounting income. As a result, taxable income will
be greater than pretax accounting income creating a deferred tax asset.
The balance sheet account is a liability – unearned rent revenue.
9. Straight-line depreciation for financial reporting; accelerated
depreciation for tax purposes. The amount expensed for tax purposes
will be greater than the amount expensed for financial reporting
purposes. As a result, the taxable income will be less than pretax
accounting income, creating a deferred tax asset. The balance sheet
account is the contra asset (CR) accumulated depreciation.
©Dr. Chula King
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Exercise 16-7 (continued)
10. Accrued expense for employee postretirement benefits, tax
deductible when subsequent payments are made. The expense for tax
purposes will occur later than the expense for financial reporting
purposes. As a result, the taxable income will be greater than pretax
accounting income
income, creating a deferred tax asset
asset. The balance sheet
account would be a liability – post retirement benefits payable.
©Dr. Chula King
All Rights Reserved