The Alamo Heights Company installs sprinkler systems for large manufacturing enterprises and golf courses.Due to the design of their systems, some projects frequently extend over a two-year period.Alamo Heights uses the percentage-of-completion method for financial accounting purposes and the completed-contract method for tax purposes.As of December 31, 2010, all projects were completed.The following information relates to projects started but not completed as of December 31, 2011: Assuming an income tax rate of 30%, what amount should be included in the deferred tax liability account at December 31, 2011?

Question

The Alamo Heights Company installs sprinkler systems for large manufacturing enterprises and golf courses.Due to the design of their systems, some projects frequently extend over a two-year period.Alamo Heights uses the percentage-of-completion method for financial accounting purposes and the completed-contract method for tax purposes.As of December 31, 2010, all projects were completed.The following information relates to projects started but not completed as of December 31, 2011:  Assuming an income tax rate of 30%, what amount should be included in the deferred tax liability account at December 31, 2011?

Quizplus · Accepted Answer

The deferred tax liability account should be calculated based on the difference between the taxable income (completed-contract method) and the financial accounting income (percentage-of-completion method). The total taxable income for the three projects is $2,700,000 (1,000,000 + 900,000 + 800,000), and the total financial accounting income is $3,000,000 (1,200,000 + 1,000,000 + 800,000). The difference is $300,000, and 30% of that amount is $90,000. However, only two-thirds of the income is recognized for tax purposes in 2011, so the deferred tax liability account should be $60,000 ($90,000 x 2/3), which is closest to option B.

The Alamo Heights Company Installs Sprinkler Systems for Large Manufacturing