Temporary and Permanent Differences

Lin has just completed its first year of operations and has a number of differences between its pretax financial income and taxable income. The differences at the end of $2019$ are as follows:

Lin recorded $$7,000$ of interest revenue on municipal bonds during $2019.$$$15,000$ of accrual$-$basis sales were recognized in income during $2019.$ They are expected to be received in cash during January $2020.$Depreciation on machinery totaled $$28,000$ using straight$-$line depreciation for financial statements. Lin's tax accountant recorded $$36,000$ of depreciation on the company's tax return.Lin was fined $$3,000$ for violating certain labor laws during $2019.$ Lin paid the fine during $2019$ and agreed to ensure future violations would not occur.Bryant Corporation has agreed to rent space from Lin in $2020.$ In December $2019,$ Lin received $$7,500$ from Bryant in advance for rent.For $2019,$ Lin reported $$9,500$ of warranty expense on its income statement. The company's warranty liability at the end of $2019$ was $$6,250.$ Lin expects additional warranty costs to be paid during $2020.$

$1.$ For each item, determine if it results in a temporary or permanent difference. If the item results in a temporary difference, determine if it results in a deferred tax asset or deferred tax liability.

Temporary or Permanent DifferenceDeferred Tax Asset $/$Liabilitya$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

b$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

c$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

d$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

e$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

f$.$

Permanent differenceTemporary difference

Deferred tax assetDeferred tax liabilityNone

$2.$ For each item, determine if it initially results in pretax financial income being greater than or less than taxable income.

a$.$Pretax financial income will be

greaterless

than taxable income.b$.$Pretax financial income will be

greaterless

than taxable income.c$.$Pretax financial income will be

greaterless

than taxable income.d$.$Pretax financial income will be

greaterless

than taxable income.e$.$Pretax financial income will be

greaterless

than taxable income.f$.$Pretax financial income will be

greaterless

than taxable income.

$3.$ Permanent differences

dodo not

reverse and

alwaysneversometimes

require interperiod income tax allocation.

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