When book profits are less than taxable

Solution

A deferred tax asset is recognized when the taxable profits are higher than the book profits, resulting in future tax benefits. It represents the taxes that the company has overpaid and can be offset against future taxable profits, resulting in a reduction of tax expenses in the future. In the given scenario, if the book profits are lower than the taxable profits, it implies that the company has paid more taxes based on the higher taxable profits. As a result, a deferred tax asset is created to recognize the future tax benefits that the company can utilize to offset against its future taxable income.