Question

Among the items reported on Perez Company's income statement for the year ended December 31 were the following:

Compensation expense for a stock option plan $50,000

Insurance premium on the life of an officer (Perez is the owner and beneficiary.) 25,000

Neither is deductible for tax purposes. Temporary differences amount to?
1) $0
2) $25,000
3) $50,000
4) $75,000

Answer 1

For Perez Company, both the compensation expense for a stock option plan and the insurance premium for the life of an officer are not deductible for tax purposes, creating temporary differences totaling $75,000 for the year.

Step-by-step explanation:

The question asks about the temporary differences that would be reported by Perez Company on its income statement. Temporary differences arise when there's a difference between accounting income and taxable income that will result in taxable or deductible amounts in the future. In this case, since both the compensation expense for a stock option plan ($50,000) and the insurance premium for the life of an officer ($25,000) are not deductible for tax purposes, these will create temporary differences.

The total of these two items is $75,000, which is the amount by which the company's financial accounting income will be higher than its taxable income for the current year. Therefore, this amount ($75,000) represents the total temporary difference for the year ended December 31.