Question

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?

I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.

Answer 1

Accrual for product warranty liability and prepaid insurance expense result in a deferred tax asset in the year they originate.

Step-by-step explanation:

The temporary difference that results in a deferred tax asset in the year it originates is I. Accrual for product warranty liability and III. Prepaid insurance expense.

When an accrual for product warranty liability is created, a temporary difference arises between the amount of warranty expense recognized for accounting purposes and the amount deductible for tax purposes. This results in a deferred tax asset because the deductible amount will be greater in future years.

Similarly, when a prepaid insurance expense is recognized for accounting purposes, a temporary difference is created as the expense is deducted over time for tax purposes. This also leads to a deferred tax asset because the deductible amount will be greater in future years.