A company's income statement reported net income of $40,000 during 2014. 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 2015. Which of the following statements is correct assuming a 35% tax rate?
A) A $3,000 deferred tax liability is reported as of December 31, 2014.
B) A $3,000 deferred tax asset is reported as of December 31, 2014.
C)A $1,050 deferred tax liability is reported as of December 31, 2014.
D)A $1,050 deferred tax asset is reported as of December 31, 2014

Question

Quizplus · Accepted Answer

The $3,000 revenue item was not included in the income tax return for 2014 because tax laws dictate that it won't be reported until 2015. However, for financial reporting purposes, it was included in the company's net income for 2014. This creates a temporary difference between the book and tax basis of the revenue item. Since the item is expected to be taxed in the future, it creates a deferred tax liability. To calculate the deferred tax liability, we multiply the temporary difference ($3,000) by the income tax rate (35%). Therefore, the correct answer is (C) $1,050 deferred tax liability.

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