CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

When applying income tax allocation, interest expense incurred on funds borrowed to acquire municipal bonds would be classified and accounted for as a ______.
A. temporary difference; tax consequences are recognized
B. permanent difference; tax consequences are recognized
C. permanent difference; no tax consequences are recognized
Explanation: Interest expense incurred on funds borrowed to acquire municipal bonds is not a tax-deductible item and therefore would never be recognized for tax purposes. It is a permanent difference and no tax consequences are recognized.

User Contributed Comments 3

User Comment
kalps Interest income from municipal bonds is tax free - permanent difference Interest for funds acquired to purchase bonds is not tax deductible for the above reason
andrewsutton Someone help me, I'm confused. A difference (temporary or permanent), is to do with the difference between GAAP and IRS treatment. So it's to do with tax consequences. So what's the second bit of the question all about?
jpducros andrew, when you have a permanent difference between tax base and accounting base, this difference will not revert in the future (its permanent !) so no deferred tax is to be accounted. That's what they mean by no tax consequences.
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