Question

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

a. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000. DEF had deducted $40,000 of depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000.

b. In year 1, DEF recognized a loss of $15,000 on land that it had held for investment. It also recognized a $20,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $30,000. DEF had deducted $15,000 of tax depreciation on the equipment.

Answer 1

In scenario a, DEF Inc. would report a favorable temporary book-tax difference for the loss on land and an unfavorable temporary book-tax difference for the gain on equipment. In scenario b, DEF would report the same book-tax differences. In year 2, DEF would report no book-tax difference for the capital loss.

Step-by-step explanation:

For scenario a, in year 1, DEF Inc. would report a favorable temporary book-tax difference of $15,000 for the loss on land since it is tax-deductible. They would also report an unfavorable temporary book-tax difference of $10,000 for the gain on equipment, as the book gain is greater than the taxable gain. In year 2, DEF would report no book-tax difference for the capital loss of $2,000, as it is deductible for both book and tax purposes. For scenario b, in year 1, DEF Inc. would report a favorable temporary book-tax difference of $15,000 for the loss on land. They would also report an unfavorable temporary book-tax difference of $10,000 for the gain on equipment. In year 2, DEF would report no book-tax difference for the capital loss of $2,000, as it is deductible for both book and tax purposes.