Skip to content

CFA Level I · CFA Level I Exam · Analysis of Income Taxes

Which of the following items would most likely create a temporary difference rather than a permanent difference?

Warranty expense accrued for accounting but deductible for tax only when paid creates a temporary difference. The timing gap reverses when claims are paid, producing a deferred tax asset. Non-deductible goodwill impairment and exempt dividends are permanent differences.

  1. AGoodwill impairment that is not tax deductible
  2. BWarranty expense recognized when accrued but deductible for tax only when paidCorrect
  3. CDividend income from a domestic investee that is exempt from tax

Explanation

Warranty expense accrued for accounting but deducted later for tax reverses when the cash is paid, creating a deferred tax asset. The other two items never enter taxable income or deductions, so they are permanent differences.

Did you get it right without looking?

One question tells you little. A timed set on Analysis of Income Taxes shows your real accuracy, how long you take and where you lose marks.

Practise Analysis of Income TaxesFree diagnostic mock

More Analysis of Income Taxes questions