A company's income statement reported net income of $40,000 during 2016. 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 2017. 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, 2016.
B)A $3,000 deferred tax asset is reported as of December 31, 2016.
C)A $1,050 deferred tax liability is reported as of December 31, 2016.
D)A $1,050 deferred tax asset is reported as of December 31, 2016.

Question

Quizplus · Accepted Answer

The deferred tax liability method is used to reconcile temporary differences between financial reporting and tax reporting. In this case, the revenue item of $3,000 is recognized for financial reporting purposes in 2016 but will not be recognized for tax purposes until 2017. This creates a temporary difference that will reverse in the future.

Since the revenue item results in a deferred tax liability, the company will pay taxes on this revenue in the future. The deferred tax liability is calculated as the temporary difference multiplied by the future tax rate.

Therefore, the correct answer is (C) a $1,050 deferred tax liability is reported as of December 31, 2016.

The calculation is as follows: 
Temporary difference = $3,000
Future tax rate = 35%
Deferred tax liability = $3,000 * 35% = $1,050

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