Chapter 19, Problem 3CA

To determine

Permanent difference: Constant mismatch between the actual taxable income and the books of records maintained by the individual, firm, or an entity is termed permanent difference. The difference is created either by including a transaction in the books of records and not in the taxable income, or including a transaction in taxable income but not in the books of record due to business situations. These differences are not adjustable; in future it remains the same.

Temporary differences: The difference between the actual taxable liability and the books of records maintained by the individual, firm, or an entity is termed temporary difference. The difference is created due to the tenure of transactions or actual performance of transactions, flow of funds into the business, or changes in the value of the asset or liability due to business situations. These differences are adjustable in future when the appropriate time for the transaction arises.

(a)

To determine whether the situation creates temporary or permanent difference.

To determine

(b)

To determine the consequence of recording the deferred tax item in the balance sheet.