CFA Practice Question

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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?

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
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