B&B Inc.'s taxable income is computed as follows. B&B's tax rate is 34%.Which of the following statements is true?

Question

B&B Inc.'s taxable income is computed as follows.   B&B's tax rate is 34%.Which of the following statements is true?

Quizplus · Accepted Answer

Temporary differences create deferred tax liabilities when taxable income exceeds pretax financial income. In this case, B&B Inc.'s taxable income ($775,000) is higher than pretax financial income ($698,286) resulting in temporary differences that increase its deferred tax liabilities. The difference between the two is $76,714 ($775,000 - $698,286), which is multiplied by the tax rate of 34% to find the deferred tax liability increase of $26,073. Therefore, the temporary differences created a net increase in B&B's deferred tax liabilities of $272,714 ($26,073 x 10).

Permanent differences arise when an item is included in taxable income but never in pretax financial income or vice versa. In this case, permanent differences cause a net decrease in B&B's deferred tax assets of $152,184 ($245,432 - $97,248) because the tax-exempt interest income and the nondeductible expenses will not generate any tax benefits. Therefore, the statements in choices A, B, and C are incorrect.

B&B Inc'S Taxable Income Is Computed as Follows