Taxable Temporary Difference in Product Warranty Liability

What does a taxable temporary difference refer to?

a. deductible temporary difference
b. future deductible amount
c. taxable temporary difference
d. tax base

Answer:

c. taxable temporary difference

In this scenario, Silver Bullet Limited has a product warranty liability amounting to $12000. The warranty costs are not tax deductible until paid out to customers. This creates a temporary difference between the company's financial reporting (where the liability is recognized) and tax reporting (where the deduction is not allowed until payment).

A taxable temporary difference occurs when an expense or liability is recognized for tax purposes at a different time than for financial reporting purposes, resulting in a future tax liability. In this case, the warranty liability is recognized for financial reporting purposes but is not yet deductible for tax purposes until the payments are made.

Therefore, the taxable temporary difference is equal to the amount of the warranty liability, which is $12000. This represents the temporary difference between the tax base (the amount deductible for tax purposes) and the carrying amount (the amount recognized for financial reporting purposes) of the warranty liability.

It's important to note that this taxable temporary difference will result in a future tax expense when the warranty costs are paid out to customers, at the applicable tax rate of 30%.