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If the income statement depreciation expense exceeds the tax return depreciation expense, then which of the following de...

If the income statement depreciation expense exceeds the tax return depreciation expense, then which of the following describes the situation:

  1. Current year taxable income is lower than accounting income and the firm has a deferred tax asset
  2. Current year taxable income is lower than accounting income and the firm has a deferred tax liability
  3. Current year taxable income is higher than accounting income and the firm has a deferred tax liability
  4. Current year taxable income is higher than accounting income and the firm has a deferred tax asset
  5. Current year taxable income is equal to accounting income and the firm has a deferred tax liability

I know the answer is D, just asking if someone can please include an explanation for how you arrived at that answer

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Answer #1

Solution:

If the income statement depreciation expense exceeds the tax return depreciation expense, then "current year taxable income is higher than accounting income and the firm has a deferred tax asset"

Explanation:

If depreciation expense reported in income statement is higher than tax depreciation it means lesser expense is allowed for tax purpose, therefore taxable income will be higher than pre tax income. Further depreciation expense is a temporary difference and it will give rise to future deductible amount for tax purpose, therefore deferred tax assets will be recognized.

Hence option D is correct.

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