Eight independent situations are described below. Each involves future deductible amounts and/or future taxable amounts: ($ in millions)

Temporary Differences Reported First on:

The Income Statement The Tax Return

Revenue Expense Revenue Expense

1. $27

2. $27

3. $27

4. $27

5. 22 27

6. 27 22

7. 22 27 17

8. 22 27 12 17

Required:

For each situation, determine taxable income assuming pretax accounting income is$100 million.

Temporary Differences Reported First on:

The Income Statement The Tax Return

Revenue Expense Revenue Expense

1) $27

2) $27

3) $27

4) $27

5) $22 $27

6) $27 $22

7) $22 $27 $17

8) $22 $27 $12 $17

Taxable Income assuming pretax accounting income is $100 million

1) Pretax Income - Revenue = $100m - $27m = $73m

2) Pretax Income + Expense = $100m + $27m = $127m

3) Pretax Income + Revenue Return = $100m + $27m = $127m

4) Pretax Income - Expense Return = $100m - $27m = $73m

5) Pretax Income - Revenue + Expense = $100m - $22m + $27m = $105m

6) Pretax Income + Expense + Revenue Return = $100m + $27m + $22m = $149m

7) Pretax Income - Revenue + Expense - Expense Return = $100m - $22m + $27m - $17m = $88m

8) Pretax Income - Revenue + Expense + Revenue Return - Expense Return = $100m - $22m + $27m + $12m - $17m = $100m

Explanation:

First, return is added to differentiate revenue and expense from the tax return from that of the income statement.

Temporary difference is defined as the difference between the tax and financial reporting bases of assets and liabilities. These differences can result in taxable or deductible amounts in future years (deferred tax assets or liabilities).

For each scenario, temporal difference of revenue reported first in the income statement is deducted from the pretax accounting income while expenses are added back to the pretax accounting income.

For temporal differences from the tax return, the revenue is added to the pretax accounting income while expenses are deducted.