Question

_____ do affect income tax expense and create DTA/DTL

a) Temporary differences
b) Permanent differences
c) Deferred tax liabilities (DTL)
d) Deferred tax assets (DTA)

Answer 1

Temporary differences affect income tax expense and create DTA/DTL

Step-by-step explanation:

A) Temporary differences

Temporary differences affect income tax expense and create Deferred Tax Assets (DTA) or Deferred Tax Liabilities (DTL). Temporary differences occur when there is a difference between the tax basis and the carrying amount of an asset or liability that will result in taxable or deductible amounts in future periods.

For example, if a company has an expense that is deducted on its financial statements but not yet deductible for tax purposes, it creates a temporary difference. This will result in a Deferred Tax Liability (DTL) because the company will have to pay more in taxes in the future when the expense becomes deductible for tax purposes.