A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2009, its first year of operations. The income tax rate is 40%. What amount(s) should Fieval report related to deferred income taxes in its 2009 balance sheet?

Question

Quizplus · Accepted Answer

The reconciliation shows that Fieval Industries has a temporary difference of $70,000 ($220,000 – $150,000) for depreciation and a deferred tax liability of $28,000 ($70,000 x 40%). This means that Fieval Industries will need to pay $28,000 in taxes in the future when the temporary difference reverses. Therefore, Fieval should report a current asset of $10,000 (income tax refund receivable) and a noncurrent liability of $28,000 (deferred tax liability) in its 2009 balance sheet. Choice A is the only option that includes both the correct current asset amount and noncurrent liability amount.

A Reconciliation of Pretax Financial Statement Income to Taxable Income