- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 9. Analysis of Income Taxes
- Subject 4. Temporary versus Permanent Differences
CFA Practice Question
Jody Corporation recognizes a deduction for tax purposes earlier than it recognizes the related expense for financial statement purposes. This will result in which of the following?
B. A taxable temporary difference and, therefore, a future income tax liability
C. A deductible temporary difference and, therefore, a future income tax asset
A. A taxable temporary difference and, therefore, a future income tax asset
B. A taxable temporary difference and, therefore, a future income tax liability
C. A deductible temporary difference and, therefore, a future income tax asset
Correct Answer: B
The deduction is already recognized for tax purposes. This will result in a future income tax liability.
User Contributed Comments 11
| User | Comment |
|---|---|
| stranger | The expense that is going to be recognised in the future is taxable and becomes a future liability now. |
| kalps | When the payment is made in the financial in the future the financial statement future income will be lower than the future taxable incone (as it has already been recognised) which will reulst in an income tax liability (I think) |
| Gina | if the deduction is already recognized for tax purposes, it is a taxable temp difference. if the deduction were recognized for financial purposes, would it then be called a deductible temp difference? |
| Gina | i understand that there is a future income tax liability. but could somebody pls explain the difference of taxable vs deductible temporary differences?? |
| examinee | Pls help with the difference between taxable vs deductible temporary difference. |
| o123 | its the opposite of being taxable on something. |
| jerylewis | exactly. a DTL is a tax liability. A DTA is a future tax deduction |
| Khadria | I. When Taxable Income < Pretax Income => DTL II. When Taxable Income > Pretax Income => DTA Here, deduction is recognised in the taxable part, so Taxable Income is more hence II case so DTA ??? |
| kutta2102 | Khadria, when deduction is recognized earlier, taxable income will be less, not more. Therefore, case I applies. Another way to look at this: Consider previous example with some modification - if there were some write-offs during the year and the amount was greater than what was recognized by the allowance method, the taxable income would be less compared to accounting income. This will result in a temporary tax liability on the accounting books which will reverse once the allowance method catches up with the actual write-offs. Hope this makes sense... |
| boddunah | Deductible Temp. Difference ---> future taxable income reduction.DTD creates deferred tax asset. Taxable Temp. Difference ---> future taxable income. TTD creates deffered tax liability. |
| johntan1979 | Without question, DTL is created because tax payable is less than tax expense (deductible recognized). And how I differentiate taxable and deductible temporary difference is: 1. Taxable TD - you will pay more taxes (tax expense) or recognize expenses in the future (on the balance sheet) 2. Deductible TD - you will pay less taxes or expenses in the future |