a.For each of the items below, determine whether the items are temporary differences or permanent differences. Also, for each temporary difference, you are required to determine whether a deferred tax asset or deferred tax liability is created by the temporary difference described. Assume that each of the temporary differences described is an originating difference.

1.Municipal bond interest

2.Accrued warranty expense

3.Sales revenues received in advance

4.Prepaid insurance where the tax deduction in future years will be less than the book expense

5.Tax depreciation expense exceeds GAAP (book) depreciation expense

6.Accrued bad debt expense

7.The dividends received deduction

8.Installment sales revenue (recognized currently for GAAP, recognized for tax purposes when cash is collected in future years)

9.Life insurance payments for executives for which the company is the beneficiary

10.Fines paid for law violations

b.Explain why temporary differences result in deferred tax assets or deferred tax liabilities while permanent differences do not, and describe the difference in the formation of deferred tax assets and deferred tax liabilities.