Temporary book tax differences due 0109 6 points for outstanding job,5 points for good/adequate job Exhibit 16-4 lists 4 temporary book tax differences. These differences affected the income statement and tax return that you saw yesterday (exhibit 16-7 and 16-8). Cew Pro duction de (1) Books (Dr) CY (2)-(1) Difference (Favorable) Unfavorable TA Item (Dr) Cr SOOD Depreciation expense Gain on fixed asset disposition Bad debt expense Warranty expense Deferred compensation $(2.400,000 54.000 (165.000) (50,000) (800,000 SCATOLOO) 70,000 (95.000) (410.000) (5 ) 16,000 70.000 170,000 (150.000) 1. What does a temporary difference mean, and how does it differ from a "permanent difference? 2. For each of the differences listed explain the difference in plain English by making up an example. Also explain why it is temporary. See example below Plain English description Why is this temporary Is this difference currently favorable to the taxpayer? Depreciation The equipment is Although tax Yes. The annual depreciated straight-line depreciation is higher depreciation for book purposes, but this year, in future years deduction is higher under accelerated book depreciation will than depreciation depreciation (MACRS) be higher. By its nature, expense. This for tax purposes accelerated results in lower depreciation means that taxable income and depreciation deductions lower taxes actually go down each year paid this year. Gain Bad debt expense Warranty expense Deferred compensation