# The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows: The

## Question:

The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows:

The income tax rate is \(38 \%\) in \(20 \mathrm{X} 4\) and \(40 \%\) in \(20 \mathrm{X} 5\). The \(20 \mathrm{X} 5\) tax rate was enacted in 20X5. For tax purposes, the following differences existed:

**a.** Expenses (given above) on the 20X4 and 20X5 statements of profit and loss include golf club dues of \(\$ 20,000\) annually, which are not deductible for income tax purposes.

**b.** Revenues (given above) on the 20X5 statement of profit and loss include \(\$ 20,000\) rent revenue, which was taxable in \(20 \mathrm{X} 4\) but was unearned for accounting purposes until 20X5.

**c.** Expenses (given above) on the 20X4 statement of profit and loss include \(\$ 16,000\) of estimated warranty costs, which are not deductible for income tax purposes until paid in \(20 \times 6\).

Required:

1. Explain whether each difference is a permanent or temporary difference.

2. Calculate income tax payable for each year.

3. Calculate income tax expense for each of \(20 \times 4\) and 20X5. Also calculate the balance in the deferred income tax account at the end of \(20 \mathrm{X} 4\) and \(20 \mathrm{X} 5\).

## Step by Step Answer:

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