Final answer:
A deferred tax liability is created when there are timing differences between financial accounting and tax accounting, specifically when expenses are deducted on the tax return but not on the income statement, and when revenue is included on the income statement but not on the tax return.
Step-by-step explanation:
The question revolves around the concept of deferred tax liability, which is an accounting term used to describe a situation where a company has underpaid taxes that are accounted for in future periods. This can stem from temporary differences between the accounting for income tax purposes (tax return) and the accounting used for financial reporting (income statement).
Creating a Deferred Tax Liability
A deferred tax liability will be created in two situations:
- An amount that is deducted on the tax return but not included as an expense on the income statement. This would mean that the company has paid less tax for the current period and will have to pay more in the future when this expense is recognized in the financial statements.
- Revenue included on the income statement but not reported on the tax return. Similarly, this indicates that the company has recognized revenue for accounting purposes without paying the corresponding tax, which will be due in future periods when it is reported for tax purposes.
In summary, the options that create a deferred tax liability are the ones where a company has reported lower tax expenses currently (leading to higher taxes in the future) and recognized more income currently (leading to higher taxes in the future).