Question

Assume Maple Corp. has just completed the third year of its existence (year 3). The table below indicates Maple’s ending book inventory for each year and the additional §263A costs (UNICAP) it was required to include in its ending inventory. Maple immediately expensed these costs for book purposes. In year 2, Maple sold all of its year 1 ending inventory, and in year 3 it sold all of its year 2 ending inventory. What book-tax difference associated with its inventory did Maple report in year 2 and year 3? (Enter a favorable difference as a positive and an unfavorable difference as a negative)

Please provide a step-by-step explanation so I can figure out what I'm doing wrong.

	Year 1	Year 2	Year 3
Ending book inventory	$2,400,000	$2,700,000	$2,040,000
Additional § 263A costs	60,000	68,000	40,000
Ending tax inventory	$2,460,000	$2,768,000	$2,080,000

Answer 1

Year 1 :

In Year 1, there is $60,000 unfavourable temporary adjustment as $60,000 additional cost has been included in the closing stock for tax purposes but it has been expensed out in books.

This unfavourable temporary adjustment will get reversed as and when these goods will be sold.

Year 2 :

In year 2, there will be $8,000 unfavourable temporary adjustment. This is due to $68,000 unfavourable temporary adjustment of ending inventory as $68,000 additional cost has been included in the closing stock for tax purposes which is expensed out in books and $60,000 favourable temporary adjustment which is reversal of year 1 unfavourable temporary adjustment since all the closing inventory of Year 1 has been sold in Year 2.

Year 3 :

In year 3, there will be $28,000 favourable temporary adjustment. This is due to $40,000 unfavourable temporary adjustment of ending inventory as $40,000 additional cost has been included in the closing stock for tax purposes which is expensed out in books and $68,000 favourable temporary adjustment which is reversal of year 2 unfavourable temporary adjustment of closing stock since all the closing inventory of Year 2 has been sold in Year 3.