Exercise 19-6

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.

For each item below, indicate whether it involves:

(1)A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.(2)A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.(3)A permanent difference.

Use the appropriate number to indicate your answer for each.

(a)

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3

The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.(b)

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A landlord collects some rents in advance. Rents received are taxable in the period when they are received.(c)

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Expenses are incurred in obtaining tax-exempt income.(d)

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Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.(e)

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Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.(f)

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For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets' lives are shorter for tax purposes.(g)

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Interest is received on an investment in tax-exempt municipal obligations.(h)

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Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)(i)

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The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.(j)

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Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.(k)

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Expenses on stock options are accrued for financial reporting purposes.

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