Understanding Temporary Differences and Deferred Tax Liabilities

a.greater than b. less than c. $304,000 d. are not e. less than f. expense, $50,000 g. $25,500 h. credit i. $105,000 j. will not be k. benefit l. increase, decrease m. temporary, temporary b.The difference between the tax base of an asset or liability and its carrying amount is called a temporary difference. c.Differences between accounting income and taxable income that will reverse in the future are called temporary differences. These differences result in either a deferred tax asset or a deferred tax liability depending on whether the taxable income will be less than or greater than the accounting income in the future when the temporary difference reverses. If a company's income tax rate increases, the effect will be to increase the amount of a deferred tax liability and decrease the amount of a deferred tax asset. A deferred tax liability arises when the taxable income is less than the accounting income, and therefore the tax payable will be higher in the future when the temporary difference is reversed. An increase in the income tax rate will increase the future tax liability, leading to an increase in the deferred tax liability. On the other hand, a deferred tax asset arises when the tax payable is less than the accounting income, and therefore the company can carry forward the excess tax payments as a future tax benefit. An increase in the income tax rate will reduce the future tax benefit, leading to a decrease in the deferred tax asset.