Thanks, Jams ! This is the third time I did this question and three times wrong :(

Reason :- my foolishness of not reading that the bad debts are to be recognized in 1992 and not in 1990 in tax return....So, my foolishness is proved :(

Word of advice :- Be fresh.... don't sleep or too little night before exam... otherwise you would be attempting the questions wrongly like I am doing today during my final review.....

jams

i din understand the answer and the question both ... can u pls explain me...

The question is talking about how much of the income reported in financial statements is to be reported in tax return as well. Any temporary differences b/w FS and Tax return would be shown and deferred tax liability or asset would be calculated there on!

"For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in 1992."

It means that company had deducted bad debts and added profit from the installment sale in 1990 financial statement income, however, both items can only be reported on tax return in 1992.

Thus, exclude these two items from the tax return and the tax is also deferred for both!

And, the answer is jams provided :

bad debt expense is a deferred asset so 1400*.25=350
installment sale is a deferred liability so 2600*.25=(650)
650-350=300.

Hope that helps ! BTW, how is your review going on?