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Lin has just completed its first year of operations and has a number of differences between its pretax financial income and taxable income. The differences
Lin has just completed its first year of operations and has a number of differences between its pretax financial income and taxable income. The differences at the end of 2019 are as follows:
- Lin recorded $7,000 of interest revenue on municipal bonds during 2019.
- $15,000 of accrual-basis sales were recognized as income during 2019. They are expected to be received in case during January 2020
- Depreciation on machinery totaled $28,000 using straight-line depreciation for financial statements. Lins tax accountant recorded $36,000 of depreciation on the companys tax return
- Lin was fined $3,000 for violating certain labor laws during 2019. Lin paid the fine during 2019 and agreed to ensure future violations would not occur
- Bryant Corporation has agreed to rent space from Lin in 2020. In December 2019, Lin received $7,500 from Bryant in advance for rent
- For 2019, Lin reported $9,500 of warranty expenses on its income statement. The companys warranty liability at the end of 2019 was $6,250. Lin expects additional warranty costs to be paid during 2020.
Required:
- For each item, determine if it results in a temporary or permanent difference. If the item results in a temporary difference, determine if it results in a deferred tax asset or deferred tax liability.
- For each item, determine if it initially results in pretax financial income being greater than or less than taxable income.
- Discuss why permanent differences do not impact future periods of taxable income and how these differences affect tax rates.
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