Exoil recorded an expense and corresponding liability to recognize potential losses relating to an oil spill in 2006 of $10 million. Its net income for the year was $200 million. It was not able to take a deduction for tax purposes until later years when it actually paid cash out in relation to this event. In 2006, with respect to this, Exoil would have:
A)recognized a deferred tax liability.
B)recognized a tax loss carryforward.
C)recognized a deferred tax asset.
D)recognized a deferred equity loss.

Question

Quizplus · Accepted Answer

Exoil would have recognized a deferred tax asset in 2006 because it recorded an expense that will reduce its taxable income in future years when it actually pays out cash for the oil spill. This creates a deferred tax asset because it will result in lower taxes in the future, which is a future tax benefit that the company can recognize on its financial statements.

Exoil Recorded an Expense and Corresponding Liability to Recognize Potential