Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?
I.A revenue is deferred for financial reporting purposes but not for tax purposes.
II.A revenue is deferred for tax purposes but not for financial reporting purposes
III.An expense is deferred for financial reporting purposes but not for tax purposes.IV. An expense is deferred for tax purposes but not for financial reporting purposes.

Question

Quizplus · Accepted Answer

Deferred tax liability arises when taxable income is expected to be higher in the future due to temporary differences between financial reporting and tax reporting. In this case, situation II will give rise to reporting a deferred tax liability because revenue is deferred for tax purposes but not for financial reporting purposes. This means that the company will need to pay taxes on this revenue in the future, resulting in a higher taxable income. Situation III will also give rise to a deferred tax liability because the expense is deferred for financial reporting purposes but not for tax purposes. This means that the company will be able to claim this expense in the future for tax purposes, resulting in a lower taxable income. Situation I and IV will not give rise to a deferred tax liability because they do not involve temporary differences between financial and tax reporting.

Assuming a 40% Statutory Tax Rate Applies to All Years