Question

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a "deferred tax asset" on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes.

Answer 1

Answer: II and III

Step-by-step explanation:

A revenue is deferred for tax purposes but not for financial reporting purposes. Here the firm has over paid tax in that accounting year and as such a lower tax is to be expected in the next period.

An expense is deferred for financial reporting purposes but not for tax purposes. Here, expenses are recognized in the income statement before they are required to be recognized as tax.