| Course | ACC 423 Intermediate Financial Accounting III (ACC/423) |
|---|---|
| Week | 3 |
| Paper type | Income tax accounting paper |
| Length | about 1,015 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 423 Week 3
Why Tax Expense Is Not the Tax Bill: Temporary and Permanent Differences, Deferred Tax Assets and Liabilities and a Valuation Allowance at a Composite School Furniture Manufacturer
[Student Name]
University of Phoenix
ACC/423: Intermediate Financial Accounting III
Week 3 Assignment
[Instructor Name]
[Date]
The company and all figures are composites written for a model paper; tax rates are simplified to one combined rate, and accounting rules and research findings come from the sources listed.
A composite company manufactures desks, chairs and science lab tables for school districts. This year it replaced two automated panel saws and a powder-coating line, sold a record volume of furniture with a five-year warranty and paid a state environmental fine. Its income statement shows pretax income of $12.0 million. Its tax return will show something else. Book income answers how the company performed; taxable income answers what the government is owed this year; income tax accounting connects the two. For simplicity, this paper uses one combined federal and state rate of 25%.
From Book Income to Taxable Income
Four items separate the two measures.
First, depreciation. The new saws and coating line cost $4.2 million. For tax purposes, the company took bonus depreciation on the new equipment, deducting $1.6 million more than book depreciation. This is a temporary difference. Over the saws' remaining lives the pattern flips, with the books charging more depreciation than the return, until the gap closes.
Second, warranties. The company expensed $800,000 of estimated warranty costs for books when the furniture was sold but can deduct only the $300,000 actually spent on repairs this year. The $500,000 difference will be deductible when future claims are paid, another temporary difference.
Third, the company's reserve fund, invested in bonds of a neighboring county, paid $200,000 of interest that federal law exempts from tax. This is a permanent difference: it will never be taxed.
Fourth, the $100,000 environmental fine is not deductible for tax, also a permanent difference.
Taxable income is $12.0 million less $1.6 million, plus $0.5 million, less $0.2 million, plus $0.1 million, or $10.8 million. Current tax payable at 25% is $2.7 million.
Deferred Tax Liability
The extra tax depreciation means the company will pay more tax in future years when the difference reverses. A deferred tax liability is recorded at the enacted rate for those years: $1.6 million times 25%, $400,000 (Financial Accounting Standards Board, 1992).
Deferred Tax Asset
The warranty accrual means the company will deduct $500,000 in future years. A deferred tax asset of $125,000 is recorded.
Tax Expense
Income tax expense is the current tax plus the net increase in deferred tax liabilities less the increase in deferred tax assets: $2.7 million plus $400,000 less $125,000, or $2.975 million. The entry debits income tax expense for $2,975,000 and deferred tax asset for $125,000, and credits income taxes payable for $2,700,000 and deferred tax liability for $400,000.
The Effective Rate
Tax expense of $2.975 million on pretax income of $12.0 million is an effective rate of about 24.8%, slightly below the 25% statutory rate. The reconciliation shows why: tax at 25% on $12.0 million would be $3.0 million; tax-exempt interest reduces it by $50,000 and the nondeductible fine adds $25,000. Temporary differences do not affect the effective rate, because their tax effect is recorded as deferred expense or benefit in the same year.
A Subsidiary's Losses and a Valuation Allowance
The company also owns a small subsidiary that makes outdoor classroom furniture and files a separate state return. It has lost money for three years and has $1.2 million of state operating loss carryforwards, a potential deferred tax asset of $72,000 at the 6% state rate. Deferred tax assets must be reduced by a valuation allowance if it is more likely than not that they will not be realized. A three-year history of losses is significant negative evidence, and the subsidiary has no firm orders to show a turnaround. The company records a full valuation allowance of $72,000, so the net asset is zero, and it will reverse the allowance only when evidence of future profits appears.
An Enacted Rate Change
In December, the state enacted a reduction in its corporate rate that takes effect in two years. The depreciation difference will reverse mostly after that date. Deferred balances must be remeasured in the period the change is enacted, using the rates expected to apply when the differences reverse, and the effect goes to tax expense this year. The remeasurement reduces the deferred tax liability by about $16,000, lowering tax expense and the effective rate slightly. The rate reconciliation in the notes lists this effect separately.
Balance Sheet Presentation
Deferred tax assets and liabilities are classified as noncurrent, regardless of when the underlying items reverse, and are netted within each tax jurisdiction. The federal and state depreciation liability and warranty asset for the parent are therefore shown as one net deferred tax liability of about $259,000 after the rate change. The subsidiary's state carryforward, fully reserved, adds nothing to the net balance but appears in the note's table of gross deferred items, where readers can see both the $72,000 asset and the allowance against it. The current tax of $2.7 million, less estimated payments made during the year of $2.4 million, leaves $300,000 as a current liability, income taxes payable.
Reading the Tax Footnote
Deferred taxes attract skepticism. Graham et al. (2012) reviewed research showing that the tax accounts, including valuation allowances and the reserve for uncertain positions, give managers room for judgment and have been used to meet earnings targets. Hanlon and Heitzman (2010) described how the book-tax difference itself carries information about earnings quality. For the furniture maker, the large depreciation difference reflects real investment, and the valuation allowance reflects a real problem in the subsidiary; both are disclosed so investors can judge them.
Conclusion
The furniture maker owed $2.7 million in tax this year but reported $2.975 million of tax expense before the rate change, because $400,000 of tax on accelerated depreciation will come due later and $125,000 of warranty deductions will reduce future tax. Permanent differences nudged the effective rate below 25%, a valuation allowance kept a doubtful asset off the books and an enacted rate cut reduced a future liability. Weygandt et al. (2021) describe this asset-and-liability approach as recording the future tax consequences of events already recognized, which is exactly what the entries do.
References
Financial Accounting Standards Board. (1992). Accounting for income taxes (Statement of Financial Accounting Standards No. 109).
Graham, J. R., Raedy, J. S., & Shackelford, D. A. (2012). Research in accounting for income taxes. Journal of Accounting and Economics, 53(1-2), 412-434. https://doi.org/10.1016/j.jacceco.2011.11.006
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178. https://doi.org/10.1016/j.jacceco.2010.09.002
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
What the ACC 423 Week 3 instructions ask
ACC 423 Week 3 usually asks students to account for income taxes under the asset and liability method. Typical requirements include identifying temporary and permanent differences, computing taxable income and income taxes payable, calculating deferred tax assets and liabilities at enacted rates, recording income tax expense as the sum of current and deferred amounts, assessing the need for a valuation allowance and handling net operating loss carryforwards and changes in enacted rates. Many sections ask for the rate reconciliation and the balance sheet presentation of deferred taxes. Calculations should be laid out clearly, each difference explained in words and the income tax standard and textbook cited in APA form.
How this ACC 423 Week 3 example is built
A furniture manufacturer supplies the common differences in a realistic mix: heavy equipment depreciated faster for tax than for books, warranties expensed for books when sold but deducted for tax when paid, tax-exempt bond interest and a nondeductible fine. The paper starts with a reconciliation from book income to taxable income, then computes the current tax. Deferred balances are built difference by difference at the enacted rate. A subsidiary with three straight years of losses provides the valuation allowance question, which turns on evidence rather than arithmetic, and a newly enacted state rate provides the remeasurement. The paper finishes with the effective rate reconciliation and a short discussion of how investors and researchers read the tax footnote.
ACC 423 Week 3 grading rubric: where the points go
The rubric for income taxes generally rewards correct classification of differences, correct computation of current and deferred taxes and a coherent explanation. Faculty check that permanent differences affect only the current computation, that temporary differences produce deferred balances at enacted future rates and that total tax expense equals current tax plus the change in deferred balances. A valuation allowance must be justified with evidence about future taxable income. Rate changes must be recorded in the period of enactment. A rate reconciliation that ties to the effective rate shows mastery. Clear tables in prose, consistent figures from start to finish and APA references complete the evaluation.
ACC 423 Week 3 help: mistakes to avoid
The mistake seen most in ACC 423 Week 3 is creating deferred taxes for permanent differences such as municipal bond interest or fines. Those never reverse, so they affect only the current year's taxable income and the effective rate. Another is using the current rate for deferred balances when a different future rate has been enacted. Use the enacted rate for the years the difference reverses. Students also forget that a valuation allowance needs evidence and cannot be based on hope. Keep the direction straight: tax deductions taken early create liabilities, and book expenses deducted later create assets. Present deferred taxes as noncurrent and net them by jurisdiction. Finally, reconcile the effective rate to the statutory rate.
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ACC 423 Week 3 questions, answered
What does ACC/423 Week 3 usually cover?
It usually covers accounting for income taxes: temporary and permanent differences, deferred tax assets and liabilities, valuation allowances, operating loss carryforwards, rate changes and the effective rate reconciliation.
Where can I find a free ACC 423 Week 3 sample paper?
This page presents a school furniture manufacturer example that reconciles book and taxable income and records every deferred tax balance, annotated in the margin. Tell us your figures and the first draft we prepare for you is free.
What is the difference between a temporary and a permanent difference?
A temporary difference reverses in future years and creates a deferred tax asset or liability; a permanent difference never reverses and affects only the current year's tax and the effective rate.
When is a valuation allowance needed?
When it is more likely than not that some or all of a deferred tax asset will not be realized, based on evidence such as a history of losses or a lack of future taxable income.
Why does tax expense differ from taxes paid?
Tax expense includes deferred taxes on temporary differences, so it reflects the tax consequences of this year's book income, not just the amount owed on this year's return.
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