ExpertHard1 markMultiple Choice
CPA · Question 45 · Area V: Entity Taxation
Which of the following creates a 'temporary difference' for deferred tax purposes?
Which of the following creates a 'temporary difference' for deferred tax purposes?
Answer options:
A.
Prepaid rent income received in the current year.
B.
Interest on municipal bonds.
C.
Life insurance premiums on key officers (corp is beneficiary).
D.
Federal income tax expense.
How to approach this question
Temporary = Timing. Prepaid income is taxed NOW but earned LATER. It will reverse.
Full Answer
A.Prepaid rent income received in the current year.✓ Correct
Prepaid rent is taxable when received for tax purposes but recognized when earned for GAAP. This creates a temporary difference that will reverse as the rent is earned.
Common mistakes
Thinking prepaid rent is permanent.
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