Final answer:
Options 2, 3, and 4 describe scenarios that result in a deferred tax asset due to timing differences between financial statement recognition and tax accounting.
However, the correct option in the final answer is option 2: Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
Step-by-step explanation:
In discussing which of the following temporary differences will result in a deferred tax asset, we need to understand the concept of temporary differences. A deferred tax asset is recognized when the income tax expense on the income statement is higher than the tax payable to the tax authorities in the current period, due to temporary timing differences. This situation indicates that, in future periods, the company will pay less tax as it reverses the temporary difference.
Looking at the options provided:
Using the straight-line depreciation method for financial statement purposes and the Modified Accelerated Cost Recovery System (MACRS) for income tax purposes typically results in higher depreciation deductions for tax purposes in the earlier years, creating a deferred tax liability instead of an asset.
Installment sale profits accounted for on the accrual basis for financial statements and on a cash basis for income tax purposes result in a situation where the income is recognized earlier in the financial statements than for tax purposes, creating a deferred tax asset.
Advance rental receipts accounted for on the accrual basis for financial statements and on a cash basis for income tax purposes would result in taxable income being recognized later than it is for financial reporting purposes, thereby creating a deferred tax asset.
Prepaid expenses accounted for on the accrual basis for financial statements and on a cash basis for tax purposes would generate a deferred tax asset, as the expense is recognized earlier for financial reporting.
Therefore, the options that give rise to a deferred tax asset are Installment sale profits (#2), Advance rental receipts (#3), and Prepaid expenses (#4). The correct option in the final answer listing a scenario where a deferred tax asset occurs is installment sale profits (#2), as it clearly describes a timing difference that will result in a deferred tax asset.