[KS0001]

In 2007, the initial year of its existence, Gibson Company's accountant, in preparing both the income statement and the tax return, developed the following list of items causing differences between accounting and taxable income:
1. The company sells its merchandise on an installment contract basis. In 2007, Gibson elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2007. These procedures created a $300,000 difference between book and taxable incomes. The future collection of the installment contracts receivables are expected to result in taxable amounts of $150,000 in each of the next two years. (Note: the company treats installment contracts receivable as a current asset on its balance sheet.)
2. The company has also chosen to depreciate all of its depreciable assets on an accelerated basis for tax purposes but on a straight-line basis for accounting purposes. These procedures resulted in $60,000 excess depreciation for tax purposes over accounting depreciation. The temporary difference due to excess tax depreciation will reverse equally over the three year period from 2008-2010.
3. Gibson leased some of its property to Brees Company on July 1, 2007. The lease was to expire on July 1, 2009 and the monthly rentals were to be $40,000. Brees, however, paid the first year's rent in advance and Gibson reported this entire amount on its tax return. These procedures resulted in a $250,000 difference between book and taxable incomes. (Note: this lease was an operating lease and Gibson classified the unearned rent as a current liability on its balance sheet.)
4. Gibson owns $200,000 of bonds issued by the State of Oregon upon which 5% interest is paid annually. In 2007, Gibson showed $10,000 of income from the bonds on its income statement but did not show any of this amount on its tax return. (Note: these bonds are classified as long-term investments on Gibson's balance sheet.)
5. In 2007, Gibson insured the lives of its chief executives. The premiums paid amounted to $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deducted on the tax return. The company is the beneficiary.

[Curlyben]

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