McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 44

Lodge, Inc.reported pre-tax book income of $5,000,000.During the year, the company increased its reserve for warranties by $200,000.The company deducted $50,000 on its tax return related to warranty payments made during the year.What is the impact on taxable income compared to pre-tax book income of the book-tax difference that results from these two events?
a.Favorable (decreases taxable income)b.Unfavorable (increases taxable income)c.Neutral (no impact on taxable income)