In the current year, a company increased its deferred tax asset by $500,000. During the year, the company most likely:
became entitled to a $500,000 tax refund. had permanent differences between accounting profit and taxable income. reported a lower accounting profit than taxable income.
Why is the first option incorrect? Thanks
An asset is a future economic benefit.
The first option – a tax refund – is clearly a future economic benefit.
A permanent difference between accounting profit and taxable income creates neither a future benefit nor a future detriment.
Lower accounting profit than taxable income may be permanent or tempory. If it’s permanent, it creates no future benefit nor detriment. If it’s temporary, it creates a future economic benefit: lower future taxable income will result in lower future taxes.
I believe that either the first or the third will create an increase in deferred tax assets. The first is better, however, because it’s certain to produce a DTA while the third may or may not (depending on whether the difference is temporary or permanent, respectively).
It’s not a good question.