Which of the following is considered a temporary difference for deferred income taxes?

A temporary difference arises when there is a discrepancy between the carrying amount of an asset or liability in the financial statements and its tax basis. This difference will affect the amount of taxable income in the current period and the future periods when the difference reverses.

Warranty liabilities are classified as temporary differences because they create a difference in timing between accounting income and taxable income. For accounting purposes, companies recognize warranty liabilities when the product is sold, reflecting the expected costs associated with future warranty claims. However, for tax purposes, these costs are typically deductible only when actually incurred. This leads to the recognition of a liability on the balance sheet for accounting purposes without a corresponding immediate tax deduction, creating a deferred tax asset.

In contrast, shareholder equity adjustments, inventory valuation, and foreign currency translation gains do not create the same kind of temporary differences relating to deferred income taxes. Shareholder equity adjustments do not directly impact taxable income in the same period. Inventory valuation can result in a permanent difference if it affects recognized income without a future reversal. As for foreign currency translation gains, they often fall into the realm of permanent differences because they do not directly result in taxes payable in the manner that generates deferred tax assets or liabilities.

Thus, warranty liabilities exemplify a temporary difference, with