Question

What book-tax differences in year 1 and year 2 associated with its capital gains and losses would ABD Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

a.
Year 1 : Year 2
Capital gains= $20,000 : $5,000
Capital losses= 8,000 : 0

b.
Year 1 : Year 2
Capital gains= $8,000 : $5,000
Capital losses= 20,000 : 0

c.
Year 1 : Year 2
Capital gains= $0 : $50,000
Capital losses= 25,000 : 30000

d.
Year 1 : Year 2
Capital gains= $0 : $40,000
Capital losses= 25,000 : 0

e.
Year 1 : Years 2- 5 : Year 6
Capital gains= $0 : $0 : 15,000
Capital losses= 10,000 : 0 : 0

f.
Year 1 : Years 2- 6 : Year 7
Capital gains= $0 : $0 : 15,000
Capital losses= 10,000 : 0 : 0

Answer 1

ABD Inc. would report various favorable or unfavorable and permanent or temporary book-tax differences across the different scenarios. These differences arise due to the distinct treatment of capital gains and losses in financial statements versus tax reporting. The exact impact depends on the timing and recognition of such gains and losses over several years.

Step-by-step explanation:

When analyzing book-tax differences associated with capital gains and losses for a corporation like ABD Inc., we categorize these differences as either favorable or unfavorable, and as permanent or temporary:

• Scenario a) In Year 1, ABD Inc. would report a favorable temporary difference of $12,000 ($20,000 in capital gains - $8,000 in capital losses). In Year 2, it would report a favorable permanent difference of $5,000 as there are no capital losses to offset the gains.
• Scenario b) In Year 1, this would result in an unfavorable temporary difference of $12,000 ($8,000 in capital gains - $20,000 in capital losses). In Year 2, a favorable permanent difference of $5,000 would be reported due to capital gains with no offsetting capital losses.
• Scenario c) In Year 1, ABD Inc. would face an unfavorable temporary difference of $25,000 due to capital losses. In Year 2, a favorable temporary difference of $50,000 would occur due to capital gains, which may offset previous losses and create a net difference depending on tax laws.
• Scenario d) Year 1 shows an unfavorable temporary difference of $25,000 because of capital losses. A favorable temporary difference of $40,000 is seen in Year 2 due to capital gains, which can be used to offset the previous year's losses.
• Scenario e) In Year 1, an unfavorable temporary difference of $10,000 is recorded due to capital losses. For Years 2-5, there would be no difference reported, and a favorable permanent difference of $15,000 in Year 6 arises from capital gains with no corresponding losses.
• Scenario f) Similar to Scenario e, Year 1 has an unfavorable temporary difference of $10,000. No difference occurs during Years 2-6, and Year 7 will display a favorable permanent difference of $15,000 from capital gains.

These differences will need to be accounted for when ABD Inc. prepares its financial statements and tax reports, reflecting the timing and recognition of gains and losses for accounting purposes versus tax purposes.