Which of the following creates a Deferred Tax Liability?

Answer options:

Tax depreciation exceeds book depreciation

Book warranty expense exceeds tax deduction

Prepaid rent received is taxed immediately but recognized over time for book

Municipal bond interest income

How to approach this question

Think: 'Pay Later' = Liability. <br/>If Tax Deduction > Book Expense NOW, I pay less tax NOW. I will pay MORE later. -> DTL.

Full Answer

A.Tax depreciation exceeds book depreciation✓ Correct

When Tax Depreciation > Book Depreciation, Taxable Income is lower than Book Income in the current year. This creates a Taxable Temporary Difference because in future years, Tax Depreciation will be lower, increasing Taxable Income. The obligation to pay those future taxes is a Deferred Tax Liability.

Common mistakes

Confusing DTA and DTL logic.

Question 43 All questions Question 45

Practice the full CPA FAR Practice Exam 3

50 questions · hints · full answers · grading

More questions from this exam

Q01Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the...Hard Q02On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The dis...Hard Q03Selected financial information for Zeno Corp. for the year ended December 31, Year 1:<br/>- Cost ...Medium Q04Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The...Hard Q05A company had the following equity transactions in Year 1:<br/>- Jan 1: 100,000 shares outstandin...Hard

View all 50 questions →