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Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on...

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

A) Favorable permanent book/tax difference

B) Unfavorable permanent book/tax difference

C) Unfavorable temporary book/tax difference

D) Favorable temporary book/tax difference

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Answer #1

C) Unfavorable temporary book/tax difference

Reason -

Temporary differences is the difference between book income versus taxable income due to expenses that are recognized in one period for taxes, but in a different period for the books.

Depreciation meets the criteria for temprary difference because of different set of rules for books depreciation calculation & tax depreciation calculation.

In the current situtaion, Book depreciation is 198,300 where as tax depreciation is 256,000. Which will give more profit in books as compared to tax return for the current year. Resulting in more payment of taxes by company in current year. Hence Unfavorable.

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