Chartered Professional Accountant (CPA) Core 1 Practice Exam

A positive balance for deferred taxes represents a deferred tax asset. True or False?

True False Depends on jurisdiction It cannot be determined

Correct Answer:

True

Explanation:

Temporary differences between financial reporting and tax rules create deferred tax assets and liabilities. A deferred tax asset arises when deductible differences or tax loss carryforwards will reduce future taxes, so it sits as a positive balance on the asset side of the balance sheet. A deferred tax liability, by contrast, reflects taxable differences that will increase future taxes and appears as a liability (a negative balance). Therefore, a positive balance for deferred taxes represents a deferred tax asset. Some jurisdictions may allow netting, but the fundamental idea is that a positive amount signals an asset.

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