Pensions & deferred tax
⏱ ~3-min readAceMark Guide
What this topic is really about
A defined‑benefit pension plan promises a specific retirement benefit based on salary and service years, requiring the employer to calculate and fund a projected benefit obligation. Thus B is correct. Choice A is a common error: defined‑contribution plans only guarantee the contribution amount, not the benefit level, so they do not promise a specified retirement benefit.
Permanent differences arise from items that are never taxable or deductible, such as tax‑exempt interest, so they do not create deferred tax assets or liabilities, which are based on temporary differences that reverse over time. Choice A misstates that permanent differences reverse, while choices C and D incorrectly label them as always favorable or unfavorable.
See the mechanism
A deferred tax liability arises when taxable income is lower than accounting income due to temporary differences, so book income exceeds taxable income and future taxes will be payable. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.
An exam-style question, fully explained
Deferred tax liability arises when:
- Identify what the question tests: Deferred tax liability arises when:.
- A deferred tax liability arises when taxable income is lower than accounting income due to temporary differences, so book income exceeds taxable income and future taxes will be payable.
- Choice A confuses current tax payable with deferred tax; a temporary excess of tax payable over tax expense does not create a deferred liability.
Traps the examiner sets
- Choice A is a common error: defined‑contribution plans only guarantee the contribution amount, not the benefit level, so they do not promise a specified retirement benefit.
- Permanent differences arise from items that are never taxable or deductible, such as tax‑exempt interest, so they do not create deferred tax assets or liabilities, which are based on temporary differences that reverse...
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