Question

Temporary differences that result in future taxable amounts create deferred tax _______, while temporary differences that result in future deductible amounts create deferred tax ______.

a) Assets; Liabilities
b) Liabilities; Assets
c) Expenses; Revenues
d) Revenues; Expenses

Answer 1

Temporary differences that lead to future payables in taxes create deferred tax liabilities, whereas those that enable future savings create deferred tax assets, correspondence reflected in answer b) Liabilities; Assets.

Step-by-step explanation:

Temporary differences that result in future taxable amounts create deferred tax liabilities, while temporary differences that result in future deductible amounts create deferred tax assets. The correct answer is b) Liabilities; Assets.

Deferred tax liabilities arise when a company anticipates that it will pay more tax in the future due to temporary differences between book income and taxable income. Conversely, deferred tax assets are recognized when a company expects to have lower tax payments in the future because of these temporary differences. This concept is essential in accounting as it helps businesses reconcile discrepancies between financial reporting and tax calculations, ensuring accurate representation of a company's future tax obligations or benefits.