Which of the following situations typically creates a deferred tax liability?

• A. Recognizing revenue earlier for tax purposes than for financial reporting
• B. Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting
• C. Recognizing bad debt expense earlier for tax purposes than for financial reporting
• D. Expensing warranty costs as incurred for both tax and financial reporting

Answer: (B)

Verified step by step guidance

1. Understand the concept of deferred tax liability: A deferred tax liability arises when taxable income is less than accounting income due to temporary differences between tax rules and financial reporting standards. This means the company will owe more taxes in the future.
2. Analyze the first option: 'Recognizing revenue earlier for tax purposes than for financial reporting.' This situation typically creates a deferred tax asset, not a liability, because the company pays taxes earlier than it recognizes the revenue in its financial statements.
3. Analyze the second option: 'Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.' This creates a deferred tax liability because accelerated depreciation reduces taxable income faster than straight-line depreciation, leading to lower taxes now but higher taxes in the future.
4. Analyze the third option: 'Recognizing bad debt expense earlier for tax purposes than for financial reporting.' This situation typically creates a deferred tax asset because the company reduces taxable income earlier than it recognizes the expense in its financial statements.
5. Analyze the fourth option: 'Expensing warranty costs as incurred for both tax and financial reporting.' Since there is no difference between tax and financial reporting treatment, this does not create a deferred tax liability or asset.