Permanent and Reversible Differences

question 49

Essay

Permanent and reversible differences
Explain whether each of the following independent situations should be treated as a reversible difference or a permanent difference.
1. For accounting purposes, Barley Corp. reports revenue from instalment sales on the accrual basis. For income tax purposes it reports the revenues by the instalment method, deferring recognition of gross profit until cash is collected.
2. Pre-tax accounting income and taxable income differ because dividends received from Canadian corporations were not included in Rye Corp.'s taxable income, while 100% of the dividends received were included as revenue for financial statement purposes.
3. Flax Corp.'s estimated warranty costs (covering a three-year period) are expensed for accounting purposes at the time of sale, but deducted for income tax purposes only when paid.

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Definitions:

Culture Shock

The experience of confusion, distress, or disorientation that can occur when a person is suddenly exposed to an unfamiliar culture, way of life, or set of attitudes.

Ethnocentrism

The act of judging another culture based on the values and standards of one's own culture, often leading to bias and misunderstanding.

Corporate Governance

The system of rules, practices, and processes by which a corporation is directed and controlled, encompassing nearly every aspect of management, from action plans and internal controls to performance measurement and corporate disclosure.

Whistle-Blowing

The act of exposing any kind of information or activity that is deemed illegal, unethical, or not correct within an organization that is either private or public.