Question

The following table illustrates the differences between a company’s contract revenue and recognized revenue for a four-year contract.

Contract revenue source	Year 1	Year 2	Year 3	Year 4
Financial Statements	$40,000	$0	$0	$0
Tax Return	$10,000	$10,000	$10,000	$10,000

Assume tax rates of 40% in Year 1 and 50% in all other years.

How much deferred income tax liability should the company recognize at the end of Year 1?

A. 12,000

B. 15,000

C. 16,000

D. 20,000

Answer 1

Deferred Tax Liability will created when there is any difference in Financial statement and tax return.

Deferred tax liability will pay in future when the income as tax return is more as per financial statement.

IT means in future when tax return income is greater than only this liability will utilize and rate of income tax is taken for that so in this given case we can take income tax rate for future.

So Deferred Tax Liability = (REvenue as per financial statement - Revenue as per tax return) X income tax rate

So Deferred Tax Liability = ($ 40,000 - $ 10,000) X 50%

So Deferred Tax Liability = $ 30,000 X 50%

So Deferred Tax Liability = $ 15,000

Answer = Option B = $ 15,000