Question

Deferred tax liabilities arise when temporary differences in expenses are deductible for tax purposes ________ They Are ________ They Are Recognized in ________ Income

1) No No
2) No Yes
3) Yes Yes
4) Yes No

Answer 1

Deferred tax liabilities arise when expenses are deductible for tax purposes before they are recognized in financial income, with the correct answer being 'Yes Yes'.

These differences are temporary and will even out over time as the underlying temporary differences reverse.

Step-by-step explanation:

Deferred tax liabilities arise when there are temporary differences between book accounting and tax accounting, specifically when expenses are deductible for tax purposes before they are recognized in financial income.

The correct answer to the question "Deferred tax liabilities arise when temporary differences in expenses are deductible for tax purposes before they are recognized in financial income" is option 3) Yes Yes.

Temporary differences typically reverse over time.

For example, depreciation methods may differ between tax reporting and financial reporting with accelerated depreciation for taxes causing higher initial tax deductions.

However, since the total depreciation expense will be the same over an asset's life, the differences will even out, and the deferred taxes will eventually be paid.

It is also pertinent to understand fiscal policy and its implications on budget deficits and debt. When governments run budget deficits, they borrow funds, typically through issuing Treasury bonds, notes, and bills.

This borrowing can lead to increased national debt, though the debt/GDP ratio can decrease if economic growth outpaces the growth of debt.