Final answer:
Using the equity method to account for an investment typically leads to a temporary difference that could result in a deferred tax liability due to the timing differences in income recognition for financial reporting and tax purposes.
Step-by-step explanation:
When a company uses the equity method to account for an investment, it recognizes its share of the investee's income or losses in its own income statement. This approach can lead to a temporary difference because the income recognized for financial reporting purposes may differ from the taxable income.
The difference in timing between financial income recognition and taxable income recognition leads to the creation of a deferred tax item. If the financial income exceeds taxable income, a deferred tax liability is created, as the company anticipates paying more taxes in the future. Conversely, if the taxable income exceeds financial income, a deferred tax asset is recognized, reflecting the expectation of lower taxes to be paid in the future.
Therefore, the correct answer to the question is d. Temporary Liability, because the difference created by the equity method is reversible over time, meaning it's a temporary difference, and it typically results in a deferred tax liability if the investee's profits are anticipated to lead to future tax payments.