Understanding Temporary Differences in Accounting: Which Transactions Affect Tax Basis

temporary difference accounting tax deferred tax asset accrued expenses interest revenue loan payable tax consequences

Which of the following would NOT lead to a temporary difference? A. Expenses of 300 have been accrued as a liability. 150 of the related expenses have already been deducted for tax purposes and 150 will be deductible for tax purposes when paid. B. Interest revenue with a carrying amount of 210 was received in advance. The related interest revenue will be taxed on a cash basis. C. Interest expense was accrued as a liability in the amount of 75. The related interest expense will be deducted for tax purposes when it is paid in cash. D. A loan payable has a carrying amount of 550. The repayment of the loan will have no tax consequences.

D. A loan payable has a carrying amount of 550. The repayment of the loan will have no tax consequences.

Option D represents a transaction without any temporary difference because there would be no difference between the carrying amount of the loan payable for accounting purposes and its tax base, as the tax consequences of repaying a loan are nil. This means that there is no temporary difference that would give rise to a deferred tax asset or liability.

A. and B. both describe temporary differences that would result in a deferred tax asset, as the amounts recognized for tax purposes differ from their accounting carrying amounts, creating a difference that will reverse in the future.

For C, although the expense has been accrued, it has not yet been paid, which means that there is a temporary difference between the expense recognized for tax purposes and the carrying amount for accounting purposes, giving rise to a deferred tax asset.

Therefore, the answer is D.

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