C is corrent. The increase in prepaid insurance in year 3 creates a deductible amount for income tax reporting purposes for the insurance paid; however, for financial reporting purposes the expense is not recognized until years subsequent to year 3 . As a result, net taxable income for future years is increased, thus, the deferred income tax liability increases. The increase in rent receivable in year 3 also increases the deferred tax liability. For income tax purposes, rents are not included in income until received (i.e., years subsequent to year 3 ). However, the amount of the receivable is earned and recognized in the income statement in year 3 . The increase in warranty obligations results in warranty expense for year 3 and will provide future deductible amounts, because under the IRS Code, a deduction for warranty cost is not permitted until such cost is incurred.
A is incorrect. The increase in prepaid insurance in year 3 creates a deductible amount for income tax reporting purposes for the insurance paid; however, for financial reporting purposes the expense is not recognized until years subsequent to year 3 . As a result, net taxable income for future years is increased, thus, the deferred income tax liability increases. The increase in rent receivable in year 3 also increases the deferred tax liability. For income tax purposes, rents are not included in income until received (i.e., years subsequent to year 3 ). However, the amount of the receivable is earned and recognized in the income statement in year 3 . The increase in warranty obligations results in warranty expense for year 3 and will provide future deductible amounts, because under the IRS Code, a deduction for warranty cost is not permitted until such cost is incurred.
B is incorrect. The increase in prepaid insurance in year 3 creates a deductible amount for income tax reporting purposes for the insurance paid; however, for financial reporting purposes the expense is not recognized until years subsequent to year 3 . As a result, net taxable income for future years is increased, thus, the deferred income tax liability increases. The increase in rent receivable in year 3 also increases the deferred tax liability. For income tax purposes, rents are not included in income until received (i.e., years subsequent to year 3 ). However, the amount of the receivable is earned and recognized in the income statement in year 3 . The increase in warranty obligations results in warranty expense for year 3 and will provide future deductible amounts, because under the IRS Code, a deduction for warranty cost is not permitted until such cost is incurred.
D is incorrect. The increase in prepaid insurance in year 3 creates a deductible amount for income tax reporting purposes for the insurance paid; however, for financial reporting purposes the expense is not recognized until years subsequent to year 3 . As a result, net taxable income for future years is increased, thus, the deferred income tax liability increases. The increase in rent receivable in year 3 also increases the deferred tax liability. For income tax purposes, rents are not included in income until received (i.e., years subsequent to year 3 ). However, the amount of the receivable is earned and recognized in the income statement in year 3 . The increase in warranty obligations results in warranty expense for year 3 and will provide future deductible amounts, because under the IRS Code, a deduction for warranty cost is not permitted until such cost is incurred.
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