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21 January, 20:36

Scott Corp. received cash of $20,000 that was included in revenues in its Year 1 financial statements, of which $12,000 will not be taxable until Year 2. Scott's enacted tax rate is 30% for Year 1, and 25% for Year 2. What amount should Scott report in its Year 1 balance sheet for deferred income tax liability?

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  1. 21 January, 21:15
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    3,000

    Explanation:

    As the income will be taxed at 25% the income tax liability will be for that amount

    12,000 x 25% = 3,000

    The tax deferred liability is generated from a temporary difference. The company is paying less income tax today but will pay more in the future. Hence there is a liability.

    The accounting reason for this treatment is to match expenses with the time they occur or the revenues which generated.
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