Question

High Noon Company (HNC) entered into a lease for a photocopier in the year. What effect does the lease have on HNC's deferred taxes asset or liability?

A. Increase in deferred tax asset
B. Increase in deferred tax liability

Answer 1

The lease for a photocopier affects High Noon Company's deferred tax assets or liabilities based on the lease classification differences between financial reporting and tax reporting. Generally, a capital lease may lead to a deferred tax liability due to temporary differences in income recognition.

Step-by-step explanation:

When High Noon Company (HNC) enters into a lease for a photocopier, it may affect the company's deferred tax assets or deferred tax liabilities. The effect of the lease on the company's deferred taxes depends on the nature of the lease and the differences between tax reporting and financial reporting. If the lease is classified as a capital lease for accounting purposes, but as an operating lease for tax purposes, this can lead to a temporary difference between the accounting income before tax and taxable income reported to the tax authority. Consequently, this may result in the recognition of a deferred tax liability, as the lease expenses would be deferred for tax purposes and result in higher taxable income relative to accounting income in the earlier years of the lease.