Which of the following situations will create a deferred tax liability?

• A. Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting
• B. Recognizing warranty expenses earlier for tax purposes than for financial reporting
• C. Recognizing revenue earlier for tax purposes than for financial reporting
• D. Using straight-line depreciation for both tax and financial reporting

Answer: (A)

Verified step by step guidance

1. Understand the concept of deferred tax liability: It arises when taxable income is temporarily lower than accounting income due to timing differences between tax and financial reporting.
2. Analyze the first option: Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting creates a timing difference. Accelerated depreciation reduces taxable income faster in the early years compared to straight-line depreciation, leading to a deferred tax liability.
3. Evaluate the second option: Recognizing warranty expenses earlier for tax purposes than for financial reporting reduces taxable income earlier, which would create a deferred tax asset, not a liability.
4. Examine the third option: Recognizing revenue earlier for tax purposes than for financial reporting increases taxable income earlier, which would also create a deferred tax asset, not a liability.
5. Review the fourth option: Using straight-line depreciation for both tax and financial reporting does not create any timing differences, so no deferred tax liability or asset would arise.