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    Deferred income taxes: temporary or permanent difference

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    The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.


    a. Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference and explain why.

    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.

    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.

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    Solution Preview

    1. Permanent difference. This is because there is a significant tax break on dividends occurs when a corporation owns stock ...

    Solution Summary

    This solution discusses the asset-liability approach for recording deferred income taxes.