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Temporary Differences between Book and Tax Income

Temporary Differences between Book and Tax Income. Accruals. Revenues and Expenses are recognized on Financial Statements before all Cash Inflows or Cash Outflows are exchanged. Ex: -Installment Sales [under the accrual method]

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Temporary Differences between Book and Tax Income

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  1. Temporary Differences between Book and Tax Income

  2. Accruals Revenues and Expenses are recognized on Financial Statements before all Cash Inflows or Cash Outflows are exchanged. Ex: -Installment Sales [under the accrual method] -Unrealized Gains/Losses from marking investments to Fair Value -Estimated Expenses and Losses such as Warranties, Bad Debt, Marking Inventory to LCM, etc.

  3. Installment Sales[Assuming Installment Sales are recorded on the Financial Statements using the Full Accrual method] Ex) Assume Installment Sales of $100,000 in 2012 Cash Collections expected as follows: 2012 $20,000 2013 $40,000 2014 $40,000

  4. Warranties Ex) Estimated Warranty Expense taken in 2012 for products sold this period is $30,000 – 3 year warranties. Expected Payouts: 2012 $0 2013 $10,000 2014 $20,000

  5. Deferrals Cash Inflows and Cash Outflows are exchanged before all Revenues and Expenses are recognized on the Financial Statements. Ex: -Rent Collected in Advance -Subscriptions Collected in Advance -Other Unearned Revenue -Prepaid Expenses -Accelerated Depreciation on the Tax Return in excess of Straight-Line Depreciation on the Financial Statements.

  6. Subscriptions Ex) In the current year, cash of $80,000 is received for customer Magazine Subscriptions. Subscription Revenue will be earned as follows: 2012 $10,000 2013 $35,000 2014 $35,000

  7. Depreciation Differences between Book and Tax Ex) On January 1, 2012, equipment is purchased for $11,000. [Salvage Value is $1,000, Expected Life is 5 years] Financial Statements use a Straight-Line method Tax Return uses a Double Declining Balance method PreTax Taxable Income Income Difference 2012 2,000 4,400 (2,400) 2013 2,000 2,640 (640) 2014 2,000 1,584 416 2015 2,000 950 1,050 2016 2,000 426 1,574 10,000 10,000 0

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