- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 27. Income Taxes
- Subject 2. Deferred Tax Assets and Liabilities
CFA Practice Question
Which of the following temporary differences ordinarily creates a future tax asset?
A. Installment sales
B. Accrued warranty costs
C. Amortization of computer equipment
Explanation: Future income taxes arise when an expense is recognized for accounting purposes but the expense is deductible for tax when paid.
User Contributed Comments 5
| User | Comment |
|---|---|
| kalps | In future taxable income wil be lower when actual warranty cost goes through and so you have a deferred tax asset |
| danlan | The cost is in financial statement and not tax report, so a tax asset is created. |
| gnja | how bout installment sales? in installment sales you recognize income only for a portion of the cash received while for tax evrything is recorded as income...doesnt that create an asset?... |
| micheleus | no gnja. it creates a liability. |
| akjohn1 | gnja. if i understand this correctly (big if), in an instalment sale, you recognize the revenue immediately for financial reporting purposes, but the cash inflow from the sale will come in instalments in future periods. in this scenario, income for financial reporting will exceed income for taxes, so your tax expense will exceed your taxes payable and thus create an deferred tax liability. |