100% A+ ANSWER SHEET - WALL STREET
PREP EXCEL CRASH COURSE RETAKE EXAM
ANSWER SHEET 48/48 **2025**
Book Income and Taxable Income
Book income NOT EQUAL to taxable income
Book Income
Income computed for
financial reporting purposes
•Intended to reflect increases in the firm’s “well-offness.”
•Includes all earned inflows of net assets, even when the inflow is not
immediately convertible into cash.
•Reflects expenses as they accrue, not just when they are paid.
Taxable Income
Income computed for
tax compliance purposes
•Governed by the “constructive receipt/ability to pay” doctrine.
,•The timing of taxation usually (but not always) follows the inflow of
cash or equivalents.
•Deductions generally are allowed only when the expenditures are
made or when a loss occurs.
* For both Divergence complicates the way income taxes are reflected
in financial reports
Temporary Differences between Book Income and Taxable Income
•A temporary difference results when a revenue (gain) or expense
(loss) enters book income in one period but affects taxable income in a
different (earlier or later) period.
•Temporary differences are so named because they eventually reverse.
Examples of Temporary Differences between Book Income and
Taxable Income
EXHIBIT 14.1 Examples of Temporary Differences between Book Income
and Taxable Income
Panel (a): Book Income Initially Exceeds Taxable Income
Depreciation Expense
Accelerated depreciation is often used to determine taxable income,
but straight-line is typically used for book income. Modified Accelerated
Cost Recovery System (M A C R S) useful lives are employed for taxable
, income whereas useful economic lives are employed for book income.
Both of these differences result in larger depreciation deductions for
tax purposes than for book purposes in the early years of an asset's life,
and the opposite effect in later years.
Bonus Depreciation
Tax law permits "bonus depreciation," or the immediate expensing of
certain capital expenditures, through 2022, at which time it begins to
phase out. From 2023 to 2026, partial bonus depreciation as a percent
of qualifying cost is 80% in 2023, 60% in 2024, 40% in 2025, and 20% in
2026. Beginning in 2027, bonus depreciation will no longer be
permitted, unless it is revived by future legislation.
Prepaid Expenses
Some business expenses, such as insurance premiums and rent, are
paid in advance. For book purposes, these expenditures are initially
recorded as assets—Prepaid insurance or Prepaid rent—but later are
expensed over the periods when the benefits are received. Tax rules
allow a current deduction in the period the payment is made, as long as
the payment covers a reasonable period.
Installment Sales
Sales are generally recognized for book purposes when the goods are
delivered to the customer regardless of when collections are made. If
PREP EXCEL CRASH COURSE RETAKE EXAM
ANSWER SHEET 48/48 **2025**
Book Income and Taxable Income
Book income NOT EQUAL to taxable income
Book Income
Income computed for
financial reporting purposes
•Intended to reflect increases in the firm’s “well-offness.”
•Includes all earned inflows of net assets, even when the inflow is not
immediately convertible into cash.
•Reflects expenses as they accrue, not just when they are paid.
Taxable Income
Income computed for
tax compliance purposes
•Governed by the “constructive receipt/ability to pay” doctrine.
,•The timing of taxation usually (but not always) follows the inflow of
cash or equivalents.
•Deductions generally are allowed only when the expenditures are
made or when a loss occurs.
* For both Divergence complicates the way income taxes are reflected
in financial reports
Temporary Differences between Book Income and Taxable Income
•A temporary difference results when a revenue (gain) or expense
(loss) enters book income in one period but affects taxable income in a
different (earlier or later) period.
•Temporary differences are so named because they eventually reverse.
Examples of Temporary Differences between Book Income and
Taxable Income
EXHIBIT 14.1 Examples of Temporary Differences between Book Income
and Taxable Income
Panel (a): Book Income Initially Exceeds Taxable Income
Depreciation Expense
Accelerated depreciation is often used to determine taxable income,
but straight-line is typically used for book income. Modified Accelerated
Cost Recovery System (M A C R S) useful lives are employed for taxable
, income whereas useful economic lives are employed for book income.
Both of these differences result in larger depreciation deductions for
tax purposes than for book purposes in the early years of an asset's life,
and the opposite effect in later years.
Bonus Depreciation
Tax law permits "bonus depreciation," or the immediate expensing of
certain capital expenditures, through 2022, at which time it begins to
phase out. From 2023 to 2026, partial bonus depreciation as a percent
of qualifying cost is 80% in 2023, 60% in 2024, 40% in 2025, and 20% in
2026. Beginning in 2027, bonus depreciation will no longer be
permitted, unless it is revived by future legislation.
Prepaid Expenses
Some business expenses, such as insurance premiums and rent, are
paid in advance. For book purposes, these expenditures are initially
recorded as assets—Prepaid insurance or Prepaid rent—but later are
expensed over the periods when the benefits are received. Tax rules
allow a current deduction in the period the payment is made, as long as
the payment covers a reasonable period.
Installment Sales
Sales are generally recognized for book purposes when the goods are
delivered to the customer regardless of when collections are made. If
