For the following temporary differences, mention the underlying balance sheet ac

Question

For the following temporary differences, mention the underlying balance sheet account where the book value is different from the tax basis and so causes the temporary difference.

-Bad Debts (Allowance Method used on financial; direct write-off method used on tax).

-Estimated Expenses (matching principle determines expense recognition on financial; cash basis determines tax deductibility on tax).

-Warranties (warranty expense is recognized in its entirety on financial in year sales were made, matching principle; warranty costs are deductible from taxes in years paid. There’s an example in the text).

Explanation / Answer

Dear Student,

Underlying Balance Sheet account for the following differences are:

a) Bad Debts (Allowance Method used on financial; direct write-off method used on tax) : Current Assets : Account receivables and current liabilities : Provision for Bad Debts;

b) Estimated Expenses (matching principle determines expense recognition on financial; cash basis determines tax deductibility on tax) Current Liabilities: Outstanding expenses

c) Warranties (warranty expense is recognized in its entirety on financial in year sales were made, matching principle; warranty costs are deductible from taxes in years paid); Current Liability i.e warranty liability and current Assets: Inventory

Regards,

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