Question

4. Which of the following is true with respect to deferred tax assets and deferred tax liabilities

a. A permanent difference is always recorded as a deferred tax asset

b. A valuation allowance is appropriate only when it is more likely than not that deferred tax asset will not be recognized

c. All deferred tax assets and deferred tax liabilities are reported as noncurrent in the balance sheet

d. A net operating loss gives rise to a deferred tax liability

Answer 1

Answer: c. All deferred tax assets and deferred tax liabilities are reported as noncurrent in the balance sheet

Explanation:

Company derives its book profits from the financial statements prepared in accordance with the rules of companies act and it calculates its taxable profit based on provision of the Income-tax Act.

This difference between the book and the taxable income or expense is known as timing difference and it can be either:

1. Temporary Difference

2. Permanent Difference

These deferred taxes are given effect to in the financial statements through Deferred Tax Asset and Liability

Deferred tax Asset is presented under Non-Current Asset and Deferred tax Lialibity under the head Non-Current Liability in the balance sheet

Both DTA and DTL can be adjusted with each other provided if they are legally enforceable by law and there is an intention to settle the asset and liability on a net basis.