[Anonymous]

Can someone please tell me what makes this a deferred tax liability and not a deferred tax asset?

At the end of 20X1, its first year of operations, Patch Co. has only one type of temporary difference—a $9,000 taxable temporary difference that is expected to reverse at the rate of $3,000 per year in each of the years 20X2–20X4. This temporary difference is not related to any specific asset or liability on the enterprise’s balance sheet. Assuming a 40% tax rate, Patch should report on its December 31, 20X1, balance sheet:

This is all the information that’s given before the answer choices are presented. Thanks.

(The answer is a $1,200 deferred tax liability classified as current and a $2,400 deferred tax liability classified as noncurrent.)

[mla1169]

Liability because they would owe taxes on in if it were not being reversed. It's an asset if it would decrease their taxes.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

Thanks mla. I still feel like I'm missing something. Can you point out exactly where in the question you get the notion of a liability from?

Thanks again

[mla1169]

Sure, “a $9,000 taxable difference” means that for some reason they have a $9,000 amount they should be paying taxes on in the current year.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

Thanks a lot. If the difference is “taxable” and they should be paying taxes on it in the current year doesn't that mean that they pay more taxes now and less later resulting in a deferred asset? The wording of it is really confusing me.

[mla1169]

They're not paying the taxes on it this year (could be a couple reasons why) so they'll book a deferred tax liability of 40% or $3600. They're going to reduce that tax liability over the next 3 years until it's zero. So the first year $1,200 is a current liability and the difference $2,400 is a non current liability. Don't worry about the reasons they're not paying the tax this year since the question is providing that it is a temporary difference that will be reversed.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

Ok, so a “taxable difference” never results in a deferred asset. If that is the case I'll just log that in the memory bank.

Thanks again

[Anonymous]

eplop,

what were the other answer choices? b/c if none of them were DTA's then you'd automatically know it had to be a DTL

[Anonymous]

and I wouldn't go by “Ok, so a “taxable difference” never results in a deferred asset.” I think you're right in that you'd need more info to determine if it's a DTA or DTL….. but this could be one of those questions where you just eliminate the wrong ones to get to the right one. Hence why I asked what the other answer choices were

[Author]

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