Which of the following creates a 'temporary difference' between book income and tax income?

Answer options:

Fines and penalties paid to the government.

Interest on municipal bonds.

Warranty expense recorded for book purposes (allowance method).

Federal income tax expense.

How to approach this question

Ask: Will this difference reverse in the future? Yes = Temporary. No = Permanent.

Full Answer

C.Warranty expense recorded for book purposes (allowance method).✓ Correct

Warranty expense is recorded on the books when the sale is made (allowance method), but is deductible for tax purposes only when the warranty work is actually performed (cash/economic performance). This creates a temporary difference that will reverse over time. Fines, muni interest, and federal taxes are permanent differences.

Common mistakes

Thinking fines are temporary (they are never deductible).

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