Question

using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposed would most likely result in a : a) valuation allowance b) deferred tax asset c) temporary difference

Answer 1

Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposed would most likely result in a c) temporary difference.

The ensuing deferred tax liability, for which the expenditure was charged to the income statement, but the tax authority has not yet been paid, will be a transitory difference since the discrepancies between tax and financial accounting will resolve over time. A valuation allowance would only become necessary if there was uncertainty about the company's capacity to generate enough income moving forward to necessitate paying the tax.

Depreciation is an accounting technique for spreading out the expense of a tangible item over the course of its useful life. How much of an asset's value has been consumed is shown through depreciation. It enables businesses to purchase assets over a predetermined period of time and generate income from those assets.

The immediate cost of ownership is significantly reduced because businesses do not have to fully account for them in the year the assets are purchased. A company's profits can be significantly impacted by not accounting for depreciation. Long-term assets can also be depreciated by businesses for tax and accounting reasons.

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