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

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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

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

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Archived Solution

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.