On December 31, 2017, XYZ Inc. has an account payable of $2,000 for operating expenses incurred during the year. These expenses are only tax deductible when paid. XYZ normally pays for its operating expenses one month after they are incurred. Assuming a 20% tax rate, these expenses shall result in:
A) a deferred tax liability of $2,000.
B) a deferred tax liability of $400.
C) a deferred tax asset of $400.
D)a deferred tax asset of $2,000.

Question

Quizplus · Accepted Answer

The expenses are deductible for tax purposes only when paid, creating a temporary difference. The tax effect of this difference is $2,000 * 20% = $400, resulting in a deferred tax asset.