Refer to Exhibit 14.1 in the textbook, Examples of Temporary Differences Between BookIncome and Taxable Income. Choose one of the temporary differences and provide anexample using numerical data to show how the temporary difference impacts both bookincome and taxable income. In addition, discuss the problem(s) this temporary differencemay cause the company. EXHIBIT 14.1 Examples of Temporary Differences between Book Incomiik o Panel (a): Book income Initially Exceeds Taxable income Depreciation Expense Accelerated depreciation is often used to determine taxable income, but straight-line is typically used for book income. ModifiedAccelerated Cost Recovery System (MACRS) useful lives are employed for taxable income whereas useful economic lives are employedfor book income. Both of these differences result in larger depreciation deductions for tax purposes than for book purposes in the earlyyears of an asset's life, and the opposite effect in later years. Bonus Depreciation Tax law permits "bonus depreciation," or the immediate expensing of certain capital expenditures, through 2022, at which time it beginsto phase out. From 2023 to 2026, partial bonus depreciation as a percent of qualifying cost is 80% in 2023, 60% in 2024, 40% in 2025,and 20% in 2026, Beginning in 2027, bonus depreciation will no longer be permitted, unless it is revived by future legislation. Prepaid Expenses Some business expenses, such as insurance premiums and rent, are paid in advance. For book purposes, these expenditures are initiallyrecorded as assets—Prepaid insurance or Prepaid rent—but later are expensed over the periods when the benefits are received, Tax rulesallow a current deduction in the period the payment is made, as long as the payment covers a reasonable period. Instaliment SalesSales are generally recognized for book purposes when the goods are delivered to the customer regardless of when collections are made.If collections are made over an extended period, tax law calls for the sales revenue to be recognized as payments are received. Equity in Undistributed Earnings of Investees If a company (investor) owns 20% or more of the outstanding voting stock of another corporation (investee), the equity method ofaccounting is generally used for book purposes (Chapter 17). Under the equity method, the investor records as income its share ofinvestee profits for the period. For tax purposes, income is recognized when investee dividends are received, resulting in a temporarydifference, However, this recognition is subject to special dividends-received deduction rules, which are described with the permanentdifferences in Exhibit 14.2, Panel {b): Taxable income Initially Exceeds Book Income Bad Debt ExpenseBad debts are accrued and recognized under the allowance method for book purposes, but tax rules follow the direct write-off method,allowing a deduction only when a particular account is deemed to be uncollectible and written off, Warranty ExpenseFor book purposes, warranty expense is recorded when the product is sold. For tax purposes, the deduction is allowed when theexpenditures are made to correct the defect. Pension and Other Post-Retirement Benefits (OPEB) Expenses For book purposes, ASC Topic 715 is used to determine the amount of pension or OPEB expense accrued. For pensions, a tax deductionis allowed for the amounts funded (that is, contributed to the pension fund) each period, subject to certain limits. For OPEB costs, adeduction is allowed for benefit payments made during the period. (These costs generally lead to taxable income initially exceeding bookincome. However, in the case of a pension (not OPEB) plan, if funding runs ahead of the expense accrual, the opposite will be true.) Revenues Received in Advance Revenues received in advance (for example, rent revenue or subscription revenue) are initially recorded as a liability for book purposes and are transferred to income as goods and services are provided to the customer. For tax purposes, these amounts are taxed when received.(coniinued ) EXHIBIT 14.1 Examples of Temporary Differences hetween Book Incomeand Taxable Income (continued) Disallowed Interest For book purposes, interest expense is determined under the effective interest method. Although that approach is also used for taxpurposes, if the amount of interest expense so determined exceeds a firm's maximum allowable interest deduction, any excess is notdeductible. However, the excess may be carried forward indefinitely and deducted in future years when the interest deduction wouldotherwise be below the maximum allowable amount. The maximum interest expense deduction in any year is the sum of (a) taxableinterest income and (b) 30% of taxable income (excluding taxable interest income) hefore any deductions for interest, depreciation,amortization, or depletion