Temporary and Permanent Differences (Appendix)

Madden Corporation wants to determine the amount of deferred tax that should be reported on its 2008 financial statements. It has compiled a list of differences between the accounting conducted for tax purposes and the accounting used for financial reporting (book) purposes.

Required For each of the following items, indicate whether the difference should be classified as a permanent or a temporary difference.

1. During 2008, Madden received interest on state bonds purchased as an investment. The interest can be treated as tax-exempt interest for tax purposes.

2. During 2008, Madden paid for a life insurance premium on two key executives. Madden’s accountant has indicated that the amount of the premium cannot be deducted for income tax purposes.

3. During December 2008, Madden received money for renting a building to a tenant. Madden must report the rent as income on its 2008 tax form. For book purposes, however, the rent will be considered income on the 2009 income statement.

4. Madden owns several pieces of equipment that it depreciates using the straight-line method for book purposes. An accelerated method of depreciation is used for tax purposes, however.

5. Madden offers a warranty on the product it sells. The corporation records the expense of the warranty repair costs in the year the product is sold (the accrual method) for book purposes.

For tax purposes, however, Madden is not allowed to deduct the expense until the period the product is repaired.

6. During 2008, Madden was assessed a large fine by the federal government for polluting the environment. Madden’s accountant has indicated that the fine cannot be deducted as an expense for income tax purposes.