ExpertMedium1 markMultiple Choice
CPA · Question 44 · Area III: Select Transactions
Which of the following creates a Deferred Tax Liability?
Which of the following creates a Deferred Tax Liability?
Answer options:
A.
Tax depreciation exceeds book depreciation
B.
Book warranty expense exceeds tax deduction
C.
Prepaid rent received is taxed immediately but recognized over time for book
D.
Municipal bond interest income
How to approach this question
Think: 'Pay Later' = Liability. <br/>If Tax Deduction > Book Expense NOW, I pay less tax NOW. I will pay MORE later. -> DTL.
Full Answer
A.Tax depreciation exceeds book depreciation✓ Correct
A
When Tax Depreciation > Book Depreciation, Taxable Income is lower than Book Income in the current year. This creates a Taxable Temporary Difference because in future years, Tax Depreciation will be lower, increasing Taxable Income. The obligation to pay those future taxes is a Deferred Tax Liability.
Common mistakes
Confusing DTA and DTL logic.
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