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Homework answers / question archive / 2)For the following differences, indicate if the difference is P (Permanent) or T (Temporary), and whether it is F (Favorable) or U (Unfavorable)

2)For the following differences, indicate if the difference is P (Permanent) or T (Temporary), and whether it is F (Favorable) or U (Unfavorable)

Accounting

2)For the following differences, indicate if the difference is P (Permanent) or T (Temporary), and whether it is F (Favorable) or U (Unfavorable).

Section 179 expensing in excess of book depreciation

Municipal interest income

Accrued bonus to executive not paid within 2 ½ months after year-end

Reserve for bad debts

Accrual for Federal income taxes

Net Operating Loss incurred in current year

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A permanent difference reffers to the differences that arises in one period and don not reverse subsequently. In short the difference is permanent and is not likely to reversed in the future period.This difference will never be eliminated.

A temporary difference that arises in one period and is capable of being reversed in one or more subsequent periods.A temporary difference will be eliminated.

Particulars Type of Difference Favorable or UnFavorable Reason
Section 179 expensing in excess of book depreciation Temporary Difference Unfavourable The difference will be eliminated in subsequent years. In subsequent years tax liability will increase since book profit is greater than taxable profit.
Municipal interest income Permanent Difference      Favorable This Income is not considered in taxable income. It is shown in the financial reporting only. It is favorable as the tax liability is reduced
Accrued bonus to executive Permanent Difference       UnFavorable If Accured bonus is not paid within 2 ½ months after year end these payments are not tax deductable.
Reserve for bad debts Temporary Difference     UnFavorable Financial accounting recognise the reserve for bad debt as expense but tax accounting recognizes when it is written off. The difference will be eliminated once the bad debt is writtenoff.
Accrual for Federal income taxes Permanent Difference      UnFavorable Tax payable is not a deductable expense under tax accounting. So the difference here is permanent.
Net Operating Loss Temporary Difference        Favorable The loss is carry forward to subsequent years.

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