Question

Aqua Domain Inc. received unearned revenue of $20,000. The revenue is taxed during the period in which it is received. Assuming a tax rate of 25%, what is the associated deferred tax asset/liability, if any?

a) Deferred tax asset of $5,000
b) Deferred tax liability of $5,000
c) Deferred tax asset of $15,000
d) Deferred tax liability of $15,000

Answer 1

The associated deferred tax asset/liability for unearned revenue of $20,000 received by Aqua Domain Inc. is a Deferred tax liability of $5,000.

Step-by-step explanation:

The question is asking about the associated deferred tax asset/liability related to unearned revenue received by Aqua Domain Inc. Unearned revenue is a liability that represents advance payments for goods or services that are yet to be delivered. In this case, Aqua Domain Inc. received $20,000 of unearned revenue, which is taxed during the period it is received.

Since unearned revenue is recognized as revenue over time as the goods or services are provided, a portion of the $20,000 will be recognized as revenue in the current period and subject to tax. The rest of the unearned revenue will be recognized as revenue in future periods and not subject to tax. As a result, a deferred tax liability of $5,000 (25% of $20,000) is associated with the unearned revenue. Therefore, the correct answer is option (b) Deferred tax liability of $5,000.