Question

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be?

1) the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
2) totally eliminated from the financial statements if the amount is related to a noncurrent asset.
3) based on the classification of the related asset or liability for financial reporting purposes.
4) the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

Answer 1

The current amount of a deferred tax liability is typically the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.

Step-by-step explanation:

The current amount of a deferred tax liability should generally be the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year. This aligns with the accounting standard requiring companies to classify deferred tax liabilities based on the expected reversal of the underlying temporary differences.

For example, if a company expects a temporary difference to reverse in the following year, resulting in taxable income, it must recognize the associated deferred tax liability as a current liability on its balance sheet. Temporary differences arise when there's a difference between the book value of assets and liabilities and their tax value.

Such situations may occur with different types of depreciations, revenue recognition, or other differences between commercial and tax accounting principles.A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be based on the classification of the related asset or liability for financial reporting purposes.