Financial statement carrying amount exceeds tax basis for assets in:

Question

Options

• AFinancial taxable amounts
• BTax-basis balance sheet
• CFuture taxable amounts
• DLoss reserves

• A
  10% (2)
• B
  5% (1)
• C
  71% (15)
• D
  14% (3)

Explanation

When an asset's carrying amount on the financial statements exceeds its tax basis, the difference represents a temporary difference that will become taxable when the asset is recovered - these are future taxable amounts, which give rise to deferred tax liabilities. This is the core deferred tax liability concept: you've already recognized more economic value in the books than the tax authorities allow now, so you'll owe tax on it later.

Why the distractors are wrong:

• A (Financial taxable amounts) - not a recognized term in deferred tax accounting; it conflates "financial" and "taxable," which are treated separately.
• B (Tax-basis balance sheet) - this is simply a balance sheet prepared using tax rules, not a description of a temporary difference relationship.
• D (Loss reserves) - relates to contingency/insurance accounting, not to asset carrying amount vs. tax basis comparisons.

Memory tip: Think "Book > Tax Basis = Future Tax Bill." When the book value is higher, you've deferred a tax obligation - you'll pay the tax in the future, hence future taxable amount.

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