Question

The largest item of the Deferred Tax Liability for most companies is caused by:________.

a. providing the allowance for doubtful accounts for book purposes.
b. differences in inventory cost flow assumptions (FIFO vs. LIFO) for tax versus financial accounting purposes.
c. differences in depreciation methods (accelerated vs. straight-line) for tax versus financial accounting purposes.
d. amortizing bond premium or discount for tax purposes.

Answer 1

Answer: c. differences in depreciation methods (accelerated vs. straight-line) for tax versus financial accounting purposes.

Step-by-step explanation:

A Deferred tax liability arises as a result of the tax authorities using a different accounting convention from the business. This leads to a situation where the company records more tax than the tax authorities do so the company will recognize the extra tax as a liability until it is paid.

The main cause of this is the difference in depreciation methods. The tax authorities use an accelerated method which would lead to a lower profit in early years which would translate to a lower tax. The company on the other hand would use straight line depreciation and calculate a higher tax. The difference is called the deferred tax liability.