A company's income statement reported net income of $40,000 during 2019.The income tax return excluded a revenue item of $3,000 (reported on the income statement)because under the tax laws the $3,000 would not be reported for tax purposes until 2020.Which of the following statements is correct assuming a 21% tax rate?
A)A $3,000 deferred tax liability is reported as of December 31,2019.
B)A $3,000 deferred tax asset is reported as of December 31,2019.
C)A $630 deferred tax liability is reported as of December 31,2019.
D)A $630 deferred tax asset is reported as of December 31,2019.

Question

Quizplus · Accepted Answer

According to the question, the company's income statement reported net income of $40,000, but $3,000 was excluded from revenue for tax purposes. Therefore, taxable income would be $37,000 ($40,000 - $3,000). At a 21% tax rate, the tax liability would be $7,770 ($37,000 x 21%), which is higher than the income tax expense reported on the income statement. This difference represents a deferred tax liability, which should be reported on the balance sheet as of December 31, 2019. The amount of the deferred tax liability is $630 ($3,000 x 21%). Therefore, the correct answer is C.

A Company's Income Statement Reported Net Income of $40,000 During