Grand River Corporation reported pretax book income of $610,000. Included in the computation were favorable temporary...

Grand River Corporation reported pretax book income of $610,000. Included in the computation were favorable temporary differences of $155,000, unfavorable temporary differences of $98,000, and favorable permanent differences of $146,000. The corporation's current income tax expense or benefit would be:

Expert Solution

1. Favourable differences are subtractions from book income when reconciling to taxable income and unfavourable differences are additions to book income when reconciling to taxable income

2. The difference in accounting for taxes between financial statements and tax returns creates a permanent and temporary difference in tax expenses on the income statement.

A permanent difference is a difference between the tax expense and tax payable caused by an item that does not reverse over time. In other words, it is a difference between financial accounting and tax accounting that is never eliminated.A permanent difference will cause a difference between the statutory tax rate and the effective tax rate. Also, because the permanent difference will never be eliminated, this tax difference does not generate deferred taxes, as in the case of temporary differences.

Temporary differences are differences in taxation due to time gap. example : change in depreciation rate of assets as per tax law and accounting standard . The difference will be created as deferred tax asset/liability.

So Permanent differences should be included while calculated taxable income and Permanent differences should not be included.

Here Pre tax book income = $610,000

Less : Favorable temporary differences - $155,000

Add : Unfavorable temporary differences - $98,000

= 5,53,000

*As discussed above Permanent differences are already included in taxable income as they cant be eliminated.

jeff jeffy answered 2 years ago

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