The asset liability approach for recording future income

taxes is an #1422
The asset-liability approach for recording future income taxes is an integral part of generally
accepted accounting principles.Instructions(a) Indicate whether each of the following
independent situations results in a reversing difference or a permanent difference in the year.
Explain your answer. Be sure to note any differences between PE GAAP and IFRS.1. Estimated
warranty costs (covering a three-year warranty) are expensed for financial reporting purposes at
the time of sale but deducted for income tax purposes when they are paid.2. Equity investments
have a quoted market value that is recorded at fair value through net income and is adjusted to
their fair value at the balance sheet date.3. The depreciation on equipment is different for book
and income tax purposes because of different bases of carrying the asset, which was acquired
in a trade-in. The different bases are a result of different rules that are used for book and tax
purposes to calculate the cost of assets acquired in a trade-in.4. A company properly uses the
equity method to account for its 30% investment in another taxable Canadian corporation. The
investee pays non-taxable dividends that are about 10% of its annual earnings.5. Management
determines that the net realizable value of the inventory is below cost, causing a writedown in
the current year.6. A company reports a contingent loss that it expects will result from an
ongoing lawsuit. The loss is not reported on the current year’s tax return. Half the loss is a
penalty it expects to be charged by the courts. This portion of the loss is not a tax-deductible
expenditure, even when it is paid.7. The company uses the revaluation model for reporting its
land and buildings. Due to current economic conditions, the fair value of the properties declined
and the writedown was recorded against the revaluation surplus reported in equity.8. The
company settles its retirement obligation on a drilling platform that is put out of service. The
actual settlement was less than the amount accrued, and the company recognizes a gain on
settlement in its accounting net income.(b) Discuss the nature of any future income tax accounts
that result from the situations in (a) above, including their possible classifications in the
company’s balance sheet. Indicate how these accounts should be reported. Note any
differences between IFRS and the asset-liability method under PE GAAP.View Solution:
The asset liability approach for recording future income taxes is an

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