Temporary and Permanent Differences (Appendix)
Madden Corporation wants to determine the amount of deferred tax that should be reported on its 2014 financial statements. It has compiled a list of differences between the accounting conducted for tax purposes and the accounting used for financial reporting (book) purposes.
Required:
For each of the following items, indicate whether the difference should be classified as a perma- nent or a temporary difference.
1. During 2014, Madden received interest on state bonds purchased as an investment. The in- terest can be treated as tax-exempt interest for tax purposes.
2. During 2014, Madden paid for a life insurance premium on two key executives. Madden's accountant has indicated that the amount of the premium cannot be deducted for income tax purposes.
3. During December 2014, Madden received money for renting a building to a tenant. Mad- den must report the rent as income on its 2014 tax form. For book purposes, however, the rent will be considered income on the 2015 income statement.
4. Madden owns several pieces of equipment that it depreciates using the straight-line method for book purposes. An accelerated method of depreciation is used for tax purposes, however.
5. Madden offers a warranty on the product it sells. The corporation records the expense of the warranty repair costs in the year the product is sold (the accrual method) for book purposes.