Question

At December 31, Year 1, a tenant paid Kimberly Company the Year 2 rental payment in advance. For financial reporting purposes, Kimberly Company recognized this payment as deferred rental income. For tax purposes, the advance payment was included in Year 1 taxable income. This difference in accounting for financial reporting and for tax purposes gives rise to a(n) ___________.

1) Deductible temporary difference.
2) Taxable temporary difference.
3) Deductible permanent difference.
4) Taxable permanent difference.

Answer 1

The difference in accounting for financial reporting and tax purposes in the scenario described gives rise to a taxable temporary difference. The correct answer is 2).

Step-by-step explanation:

The correct answer is 2) Taxable temporary difference. A taxable temporary difference arises when the recognition of income or expense for tax purposes differs from its recognition for financial reporting purposes. In this case, Kimberly Company received rental payment in advance at December 31, Year 1, and recognized it as deferred rental income for financial reporting purposes.

However, for tax purposes, this advance payment was included in Year 1 taxable income. The difference in accounting between financial reporting and tax purposes creates a taxable temporary difference because the tax will be paid on this income in Year 1, while it will be recognized as rental income for financial reporting purposes in Year 2.