ExpertHard1 markMultiple Choice
CPA · Question 34 · Area V: Entity Taxation
Which of the following creates a 'temporary difference' between book income and tax income?
Which of the following creates a 'temporary difference' between book income and tax income?
Answer options:
A.
Fines and penalties paid to the government.
B.
Interest on municipal bonds.
C.
Warranty expense recorded for book purposes (allowance method).
D.
Federal income tax expense.
How to approach this question
Ask: Will this difference reverse in the future? Yes = Temporary. No = Permanent.
Full Answer
C.Warranty expense recorded for book purposes (allowance method).✓ Correct
C
Warranty expense is recorded on the books when the sale is made (allowance method), but is deductible for tax purposes only when the warranty work is actually performed (cash/economic performance). This creates a temporary difference that will reverse over time. Fines, muni interest, and federal taxes are permanent differences.
Common mistakes
Thinking fines are temporary (they are never deductible).
Practice the full CPA REG Practice Exam 2
72 questions · hints · full answers · grading
More questions from this exam
Q01A CPA is representing a client in an IRS examination regarding a complex tax shelter transaction....HardQ02A tax return preparer is facing a penalty for an understatement of tax liability on a client's re...HardQ03Taxpayer L received a Statutory Notice of Deficiency (90-day letter) from the IRS regarding a tax...HardQ04A CPA is sued for common law negligence by a third party who relied on the CPA's audit report. Th...HardQ05Which of the following communications between a CPA and a client would generally be protected by ...Hard