On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A footnote reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report:

Question

Quizplus · Accepted Answer

The excess tax depreciation of $6 million creates a deferred tax liability because it will result in lower taxes in the future. Since $1 million of the excess depreciation will reverse next year, it will create a current portion of the deferred tax liability which should be reported as a current liability, while the remaining $5 million will create a noncurrent portion of the deferred tax liability which should be reported as a noncurrent liability on the balance sheet. Therefore, the correct answer is a noncurrent deferred tax liability (choice D). There is no current deferred tax asset, current deferred tax liability, or both (choices A, B, and C) because the excess tax depreciation results in a deferred tax liability that is either current or noncurrent.

On Its Tax Return at the End of the Current