In: Accounting
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 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. Year 1 Year 2 Year 3 Ending book inventory $ 2,870,000 $ 3,242,500 $ 2,517,500 Additional §263A costs 55,000 74,250 56,250 Ending tax inventory $ 2,925,000 $ 3,316,750 $ 2,573,750 Required: 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? 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? 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?
Solution:
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?
Year 1: $55,000 unfavorable temporary adjustment(inventory costs deducted for books but included in ending inventory for tax).
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?
Year 2: $19,250 unfavorable temporary adjustment. This is the net of a $74,250 unfavorable adjustment for amounts included in ending inventory for tax but deducted for books and a $55,000 favorable adjustment for the reversal of the adjustment in year 1 (Check year 1).
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?
Year 3: $18,000 favorable temporary adjustment. This is the net of a $56,250 unfavorable adjustment for amounts included in ending inventory for tax but deducted for books in year 3 and a $74,250 favorable adjustment for the reversal of the amount capitalized to inventory in year 2 (Check year 2).