CFA Level I · CFA Level I Exam · Analysis of Income Taxes
Which of the following differences between accounting profit and taxable income will most likely reverse in future periods?
The warranty expense difference will reverse, because the accounting expense is recognised now while the tax deduction occurs when the warranty is paid. That makes it a temporary difference. Exempt interest income and non-deductible penalties are permanent differences that never reverse.
- AInterest income on government bonds exempt from tax
- BWarranty expense recognised for accounting before it is deductible for tax when paidCorrect
- CPenalties for breaching regulations that are never deductible
Explanation
Warranty expense is recognised in accounting when accrued but deducted for tax when paid, so the difference reverses when claims are settled; it is a temporary difference. Exempt interest and non-deductible penalties are permanent differences that never reverse.
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