Copyright McGraw-Hill Education. Permission required for reproduction or display Item Depreciation expense Gain on fixed asset disposition Bad debt expense Warranty expense Deferred compensation (1) Books (Dr) Cr $(2,400,000) 54,000 (165,000) (580,000) (300,000) Tax (Dr) Cr $(3,100,000) 70,000 (95,000) (410,000) (450,000) (2) - (1) Difference (Favorable) Unfavorable $(700,000) 16,000 70,000 170,000 (150,000) 5. In the example of the table above, deferred compensation represents a temporary favorable difference. Explain why and how this could happen? Hint: The answer is very simple and relates to the very nature of temporary differences