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Basic Question 13 of 15
A firm received magazine subscription revenue of $6,000 for next year from a corporate client. The firm treats this as unearned revenue for financial reporting purposes. It is taxed on a cash basis. The firm should ______
B. create a deferred tax liability of $6,000.
C. do nothing because this represents a permanent difference.
A. create a deferred tax asset of $6,000.
B. create a deferred tax liability of $6,000.
C. do nothing because this represents a permanent difference.
User Contributed Comments 13
| User | Comment |
|---|---|
| toyo | I think DTA should be (6,000*tax rate), not 6,000. |
| JohnnyWu | verdict? |
| charliedba | NO. It's the gross taxable amount. It should be $6,000. |
| gill15 | When the carrying amount is greater then the tax base it creates a deferred tax liability not an asset. |
| gill15 | My bad...confused a little with this section. DTL arises when carrying value of Asset > Tax Base OR carrying value of Liability < tax base.... spent more time on taxes than any other section soo far in accounting. |
| phani78 | It would create a deferred revenue of $6000 which would in turn lead to a deferred tax asset but we do not have additional information to determine the pre tax income. |
| Ifi2703 | Think about it in this way - unearned revenue will be taxed immediately and that extra amount ($6k) is counted as part of the company's regular income by the taxman. So, essentially, the company is paying tax this year on $6k more of revenue that it wont have next year. This means that for next year, the company will have this tax 'overpayment' as a DTA. |
| bidisha | ifi your explanations have helped me a lot in this chapter |
| jonan203 | so i took a walk to ponder this specific question and decided to share what i came up with... since most companies use the accrual basis of accounting, they would pay taxes on this revenue regardless of the fact that they haven't received they haven't "earned" it yet suppossed the revenue is realized in a subsequent year, since the tax was paid during the year prior there would be no tax due in the year current... the tax paid during the prior year on unearned revenue becomes an asset that offsets any taxes due in the year the revenue is realized... now i have to think about what would happen if rates were raised or lowered prior to the revenue being fully realized... please feel free to correct me if i am wrong! |
| Seancfa1 | Thank-you lfi and Jonan! |
| dbedford | Your deferred tax asset is the amount that the IRS taxable amount is above what you reported on your books as being taxable. |
| Freddie33 | Ifi is a tax maste |
| walterli | Accounting Income would be more than Taxable income because it includes unearned revenue,so it taxed more so tax expense is more than tax payable, then it should be DTA. |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
explain how deferred tax liabilities and assets are created and the factors that determine how a company's deferred tax liabilities and assets should be treated for the purposes of financial analysis
CFA® 2024 Level I Curriculum, Volume 3, Module 9.