Question

Exercise 2

1.

How would the tax accounts change if the temporary difference for the bad debt reserve was a decrease of $70,000 instead of $40,000?

2.

A B C

What happens to the effective tax rate?

– Increases – Decreases – No Impact

Please explain your answer.

3.

How would the tax accounts change if there was $150,000 of tax exempt income that was not taken into consideration?

What happens to the effective rate?

– Increases – Decreases – No Impact

4.

A B C

Please explain your answer.

Answer 1

Part 1)

Bad debts reserve is an expense that is claimed in Statement of profit and loss or Income Statement. But this is not allowed for tax purpose at the time of creation, it is only allowed when actual bad debts occur.

So if Bad debt reserve is 70,000 instead of 40,000. Then the present tax increases.

So the Effective tax rate also Increases

Part 2)

If there is exempt income (permanent difference) no tax is paid on such income in any year.

This will lead to decrease in effective tax rate for the year (because it has exempted income which is not at all taxed)