Chap16 - CHAPTER 16 QUESTIONS 1. Income measurement for...

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CHAPTER 16 QUESTIONS 1. Income measurement for financial reporting purposes is designed to measure as fairly as possible the increase in equity arising from operations during the period. Income measurement for tax purposes is selected by the company to minimize its income tax liability and by the government to raise revenue and to meet changing economic and policy objectives. These different ob- jectives frequently result in different ac- counting methods for financial reporting and for income tax purposes. 2. Certain expenses will never be deductible for tax purposes because of provisions within the tax law. These are referred to as permanent differences or nondeductible ex- penses . Temporary differences are differ- ences between taxable and financial income that result in taxable or deductible amounts when the reported amount of an asset or a liability in the financial statements is recov- ered or settled, respectively. A temporary difference that results in a larger current- year taxable income will reverse in a future year and result in a deductible amount to offset against other taxable income. While a nondeductible expense is never deductible for tax purposes, a temporary difference is deductible in future periods. 3. A taxable temporary difference is one that will result in taxable amounts in future years. Taxable temporary differences involve report- ing high deductions for tax purposes now with corresponding low deductions in future years. An example is the difference between straight-line depreciation for financial report- ing purposes and MACRS for tax purposes. A taxable temporary difference can also stem from reporting low revenue for tax purposes now with corresponding high tax- able revenue in future years. An example is the difference between the installment sales method for tax purposes and the ac- crual method for financial reporting. A deductible temporary difference is one that will result in deductible amounts in fu- ture years. Deductible temporary differ- ences involve reporting low deductions for tax purposes now with corresponding high deductions in future years. An example is the difference between reporting an esti- mate of future warranty costs as an ex- pense in the year of the sale for financial reporting and waiting to record the deduc- tion for tax purposes until the actual war- ranty costs are paid. A deductible tempo- rary difference can also stem from reporting high revenue for tax purposes now, with corresponding low taxable revenue in fu- ture years. An example is the difference be- tween reporting the receipt of advance rent payments as revenue for tax purposes when they are received and waiting to re- port the revenue until it is earned for finan- cial reporting purposes. 4.
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Chap16 - CHAPTER 16 QUESTIONS 1. Income measurement for...

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