AKP Ltd uses the accrual-basis method of accounting for accounting profit. In the current accounting period, they have recognised income for interest not yet received. Taxable income is determined on a cash basis. Based on this information, which of the following statements is correct?
A) Taxable income will be greater than accounting profit, and will give rise to a deferred tax liability.
B) Taxable income will be less than accounting profit, and will give rise to a deferred tax liability.
C) Taxable income will be greater than accounting profit, and will give rise to a deferred tax benefit.
D) Taxable income will be less than accounting profit, and will give rise to a deferred tax benefit.

Question

Quizplus · Accepted Answer

Taxable income is less than accounting profit because the interest income recognized in the accounting profit has not yet been received and thus is not included in taxable income. This difference gives rise to a deferred tax liability, as the company will pay taxes on this income in the future when it is received.

AKP Ltd Uses the Accrual-Basis Method of Accounting for Accounting