b. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. DEF also recognized a $20,000 gain onequipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $30,000. DEF haddeducted $15,000 of tax depreciation on the equipment.Year1Book-taxDifference$ 12,000FavorableorTemporaryorUnfavorablePermanentUnfavorable ✔ Temporary ✔ Required information[The following information applies to the questions displayed below.]What book-tax differences in year 1 and year 2 associated with its capital gains and losses would DEF Inc. report in thefollowing alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent ortemporary.a. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. In year 1, it also recognized a $30,000 gain onequipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000. DEF haddeducted $40,000 of depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000.Year 1Year 2Book-taxDifferenceFavorable or Temporary orUnfavorable Permanent

a. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000. DEF had deducted $40,000 of depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000. Year 1 Year 2 Book-tax Difference Favorable or Temporary or Unfavorable Permanent

a. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000. DEF had deducted $40,000 of depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000. Year 1 Year 2 Book-tax Difference Favorable or Temporary or Unfavorable Permanent

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, year 1, Wardags Co. purchased a P6,000,000 machine, with a five-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machine’s carrying amount was P2,400,000 on December 31, year 2. On January 1, year 3, Wardags changed to the straight-line method for financial reporting purposes. Wardags can justify the change. Wardags’s income tax rate is 30%. In its year 3 income statement, 1. What amount should Warren report as the cumulative effect of this change? 2. On January 1, year 3, what amount should Warren report as deferred income tax liability as a result of the change?
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