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Permanent and Temporary Tax Differences

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1. Why are there differences between taxable and financial income? What are some examples of permanent and temporary differences? Why do these differences exist? How do they affect the financial statements?

2. How are deferred tax assets and deferred tax liabilities derived? How do they relate to the difference between tax expense and taxes payable? How could an organization have a tax receivable? Why is the tax expense reported on the income statement comprised of current and deferred tax?

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Solution Summary

This solution outlines the differences between permanent and temporary tax differences that make up tax deferred assets and liabilities realted to taxable income versus financial income.

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1. The primary differences between financial income and taxable income are due to the fact that taxable income is measured under statutory rules, whereas financial income is determined by the total effects of all transactions made during the year under the system known as generally accepted accounting principles. Taxable income does not include interest income on tax-exempt bonds and the related expense of interest paid on a loan to purchase the tax-exempt bonds is also not a tax item, this is an ...

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