Temporary Differences Resulting in Deferred Tax Assets | CFA® Level 1 Exam Preparation

Temporary Differences Resulting in Deferred Tax Assets

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Question

Which of the following temporary differences will result in a deferred tax asset?

Answers

A. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.

B. Prepaid expenses accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.

C. Use of the straight-line depreciation method for financial statement purposes and the Modified Accelerated Cost Recovery System (MACRS) for income tax purposes.

D. None of these answers.

E. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes. E

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Explanations

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A. B. C. D. E.

Explanation

A deferred tax asset records deferred tax consequences attributable to deductible temporary differences. Advance rental receipts accounted for on the accrual basis for accounting purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The income statement would show no revenue and no related tax expense. However, on the tax return, the cash received is reported as revenue and the tax would be due now, resulting in a prepaid tax on the balance sheet called a deferred tax asset.

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