Question

Assume Maple Corp. has just completed the third year of its existence (year 3). The table below indicates Maple’s ending book inventory for each year and the additional §263A costs it was required to include in its ending inventory. Maple immediately expensed these costs for book purposes. In year 2, Maple sold all of its year 1 ending inventory, and in year 3 it sold all of its year 2 ending inventory.

	Year 1			Year 2			Year 3
Ending book inventory	$	3,300,000		$	3,610,000		$	2,899,000
Additional §263A costs		41,000			80,500			63,750
Ending tax inventory	$	3,341,000		$	3,690,500		$	2,962,750

Required:

1. What book-tax difference associated with its inventory did Maple report in year 1? Was the difference favorable or unfavorable? Was it permanent or temporary?
2. What book-tax difference associated with its inventory did Maple report in year 2? Was the difference favorable or unfavorable? Was it permanent or temporary?
3. What book-tax difference associated with its inventory did Maple report in year 3? Was the difference favorable or unfavorable? Was it permanent or temporary?

Answer 1

Year 1: $41,000 unfavorable temporary adjustment (inventory costs deducted for books but included in ending inventory for tax).

Year 2: $39,500 unfavorable temporary adjustment. This is the net of a $80,500 unfavorable adjustment for amounts included in ending inventory for tax, but deducted for books and a $41,000 favorable adjustment for the reversal of the adjustment in year 1 (see part a).

Year 3: $16,750 favorable temporary adjustment. This is the net of a $63,750 unfavorable adjustment for amounts included in ending inventory for tax, but deducted for books in year 3 and a $80,500 favorable adjustment for the reversal of the amount capitalized to inventory in year 2 (see part b).