Listed below are items that are treated differently foraccounting purposes than they are for tax purposes.
(i) Explain the difference between a temporary difference and apermanent difference.
(ii) Indicate whether the items are permanent differences ortemporary differences. For
temporary differences, indicate whether they will create deferredtax assets or deferred
tax liabilities.
1. An accelerated depreciation system is used for tax purposes, andthe straight-line depreciation method is used for financialreporting purposes for some plant assets.
2. A landlord collects some rents in advance. Rents received aretaxable in the period when they are received.
3. Expenses are incurred in obtaining tax-exempt income.
4. Costs of guarantees and warranties are estimated and accrued forfinancial reporting purposes.
5. Installment sales of investments are accounted for by theaccrual method for financial reporting purposes and the installmentmethod for tax purposes.
6. Interest is received on an investment in tax-exempt governmentalobligations.
7. For some assets, straight-line depreciation is used for bothfinancial reporting purposes and tax purposes, but the assets’lives are shorter for tax purposes.
8. The tax return reports a deduction for 80% of the dividendsreceived from various corporations. The cost method is used inaccounting for the related investments for financial reportingpurposes.
