CFA Level I · CFA Level I Exam · Analysis of Income Taxes
A company has a liability for warranty provisions with a carrying amount of 80,000. Warranty costs are deductible for tax only when paid. The tax base of the liability is closest to:
The tax base is zero. For a liability, the tax base equals the carrying amount less any amount deductible for tax in future periods. Because the entire 80,000 warranty provision becomes deductible only when paid, the tax base is 80,000 minus 80,000, which is zero.
- A0Correct
- B40,000
- C80,000
Explanation
Tax base of a liability = carrying amount less amounts deductible in future periods. All 80,000 is deductible when paid, so the tax base is 80,000 − 80,000 = 0. The carrying amount exceeds the tax base by 80,000, a deductible temporary difference giving rise to a deferred tax asset.
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