Task: The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.
Instructions:
a. Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference and explain why.
Question 1. A company properly uses the equity method to account for its 30% investment in another company. The investee pays dividends that are about 10% of its annual earnings.
Question 2. A company reports a gain on an involuntary conversion of a nonmonetary asset to a monetary asset. The company elects to replace the property within the statutory period using the total proceeds so the gain is not reported on the current year's tax return.