The tax effect method of accounting for a company's income tax is based on an assumption that:
A) income tax expense is equal to income tax payable;
B) an accounting balance sheet and a tax balance sheet are the same;
C) a tax balance sheet is prepared according to accounting standards;
D) income tax expense is not equal to current tax liability.

Question

Quizplus · Accepted Answer

The tax effect method assumes that income tax expense is not equal to current tax liability, as it takes into account the temporary differences between the timing and amount of accounting and tax recognition of assets and liabilities. This method involves calculating the deferred tax liability or asset and recognizing it on the balance sheet. Therefore, options A, B, and C are incorrect.

The Tax Effect Method of Accounting for a Company's Income