Which of the following account balances would typically give rise to Deferred Tax Asset?I. Provision for annual leaveII. Unearned revenueIII. InventoryIV. Prepaid Insurance
Question
Which of the following account balances would typically give rise to Deferred Tax Asset?I. Provision for annual leaveII. Unearned revenueIII. InventoryIV. Prepaid Insurance
Solution
The following account balances would typically give rise to a Deferred Tax Asset:
I. Provision for annual leave: This is an expense that is recognized for accounting purposes before it is for tax purposes. Therefore, it would give rise to a deferred tax asset.
II. Unearned revenue: This is income received but not yet earned. For tax purposes, it is usually taxed when received, but for accounting purposes, it is recognized when earned. Therefore, it would give rise to a deferred tax liability, not a deferred tax asset.
III. Inventory: If the inventory is valued on a different basis for tax and accounting purposes, it could give rise to either a deferred tax asset or liability, depending on the specifics.
IV. Prepaid Insurance: This is an asset that is recognized for accounting purposes before it is for tax purposes. Therefore, it would give rise to a deferred tax asset.
So, the account balances that would typically give rise to a Deferred Tax Asset are Provision for annual leave, Inventory (depending on specifics), and Prepaid Insurance.
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