Final answer:
Taxable temporary differences will create a deferred tax liability because they represent future tax payments that will be higher when those differences reverse. This is tied to the expected timing and amount of the reversal, which, under current tax laws, would result in a tax liability.
Step-by-step explanation:
A deferred tax liability is created when there are taxable temporary differences that will result in taxable amounts in future years when the related assets are recovered or liabilities are settled. Specifically, this liability represents the taxes that will be due in the future when those temporary differences reverse, based on current tax laws. This positions the company to pay more in taxes on its future tax return than what is accounted for in the current period's financial statements.
Looking at the options provided:
- An increase in the carrying amount of an asset for tax purposes usually reduces taxable income now and leads to higher taxes in the future when the asset is depreciated, therefore creating a deferred tax liability.
- A decrease in the carrying amount of liability for tax purposes implies more income is taxable now, which typically does not create a deferred tax liability.
- Taxable temporary differences do create a deferred tax liability because they will cause future tax payments to be higher.
- Deductible temporary differences, on the other hand, result in a deferred tax asset, as they are expected to reduce future taxable income.
To directly answer the question posed by the student, option 3, taxable temporary differences, will create a deferred tax liability.