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 I.R.C. §263A costs 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.

Ending book inventory

$

2,680,000

$

3,132,500

$

2,395,500

Additional I.R.C

71,000

88,250

58,500

Ending tax inventory

$

2,751,000

$

3,220,750

$

2,454,000

1. What book–tax difference associated with its inventory did Maple report in year 1? Was the difference favorable or unfavorable? Was it permanent or temporary?
2. What book–tax difference associated with its inventory did Maple report in year 2? Was the difference favorable or unfavorable? Was it permanent or temporary?
3. What book–tax difference associated with its inventory did Maple report in year 3? Was the difference favorable or unfavorable? Was it permanent or temporary?

Answer 1

Calculate the book-tax difference associated with its inventory for Year 1, Year 2, and Year 3, as follows: