medium · Financial Accounting liabilities-bonds-payable
A firm sells equipment for a $500,000 gain for book purposes, but for tax purposes, it uses the installment method and will recognize the gain as cash is collected over 5 years.
In the first year, how is the total tax provision affected?
- The total tax provision decreases in the current year because the actual cash tax payment on the gain is deferred over the installment period.
- The total tax provision is unaffected because current tax decreases and deferred tax increases by the same amount.
- A Deferred Tax Asset is created because taxable income temporarily exceeds book income during the collection period.
- A permanent difference is created between book and tax gain recognition, which lowers the company's effective tax rate over time.
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