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Chapter 19: Q4CA_(c) (page 1106)

Part B: Gumowski Company’s president has heard that deferred income taxes can be classified in different ways in the balance sheet

Instructions

Identify the conditions under which deferred income taxes would be classified as a noncurrent item in the balance sheet. What justification exists for such classification?

Short Answer

Expert verified

Net deferred tax assets or liability accounts lead to inflow or outflow of benefits over the long run. Therefore, they are reported as non-current items.

Step by step solution

01

Definition of Income Tax

Income tax can be defined as the fees paid by the earnings individual or business entity to the government or taxation authority. Such fees are paid as a specific percentage of the income earned above the limits established by the government.

02

Conditions under which deferred income tax will be recorded as a non-current item in the balance sheet

A deferred tax account is either an asset or a liability. This account is reported as a non-current item on the balance sheet because it will lead to inflow or outflow of benefits over a long period. The business entity first recognizes deferred tax assets and deferred tax liabilities separately. Both of these are offset against each other, and then thenet deferred tax asset/net deferred tax liabilityisreported in the non-current section of the balance sheet.

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Most popular questions from this chapter

Youngman Corporation has temporary differences at December 31, 2017, that result in the following deferred taxes. Deferred tax liability related to depreciation difference $38,000 Deferred tax asset related to warranty liability 62,000 Deferred tax liability related to revenue recognition 96,000 Deferred tax asset related to litigation accruals 27,000 Indicate how these balances would be presented in Youngman’s December 31, 2017, balance sheet.

Nadal Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows. 2017 2018 2019 2020 Taxable amounts \(40,000 \)50,000 \(60,000 \)80,000 Deductible amounts (15,000) (19,000) \(40,000 \)35,000 \(41,000 \)80,000 As of the beginning of 2016, the enacted tax rate is 34% for 2016 and 2017, and 38% for 2018–2021. At the beginning of 2016, the company had no deferred income taxes on its balance sheet. Taxable income for 2016 is $500,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.

Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2017.

At December 31, 2017, Hillyard Corporation has a deferred tax asset of \(200,000. After a careful review of all available evidence, it is determined that it is more likely than not that \)60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?
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