Which of the following creates a 'temporary difference' for deferred tax purposes?

Answer options:

Prepaid rent income received in the current year.

Interest on municipal bonds.

Life insurance premiums on key officers (corp is beneficiary).

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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