- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 9. Analysis of Income Taxes
- Subject 3. Determining the Tax Base of Assets and Liabilities
CFA Practice Question
Dynamite Corporation paid a two-year property insurance premium on January 2. How much of the expense is recorded for book purposes and deductible for tax purposes in that year, assuming Dynamite is on a calendar-year basis for financial reporting?
A. 100% : 50%
B. 50% : 100%
C. 0% : 100%
Book : Tax
A. 100% : 50%
B. 50% : 100%
C. 0% : 100%
Correct Answer: B
Insurance expense is deductible in the year of payment for tax purposes. Insurance expense is recorded for book purposes in the period in which it is incurred. Since one-half of the premium relates to coverage for the year, one-half of the cost would be expensed.
User Contributed Comments 9
| User | Comment |
|---|---|
| danlan | Ok, on financial statement, it's 50% deductible; on tax return report, it's 100% deductible for the first year, then 0% for the second year. |
| mtcfa | On financial statement, the cost is spread over the life of the policy. So if it were 4 years, it would be 25% each year on the financilal statements and 100% for tax. |
| surob | Man, this tax concept is confusing me a lot |
| yyuen000 | Always remember, tax accounting is on cash basis while financial accounting is on accrual basis |
| rfvo | Good Tip Yyuen |
| Fotsta | Thanks yyuen |
| essoh | i am very confused too but trying to reverse the tendency |
| Rosalind | Do we really need to know tax law for the exam? I was a tax consultant in a different jurisdiction before, and I am quite sure that many expenses are not recognized on a cash basis but on accruals basis. It depends on the type of income and expense. Eg. interest income often taxed on accrual (not receipt) basis |
| pigletin | its year end,so 50% is recognized |