Final answer:
If a Deferred Tax Liability is expected to be resolved within the first six months of the upcoming year, it should be classified as a current liability. The classification is based on the expectation that the liability will be settled within the financial year following the balance sheet date.
Step-by-step explanation:
When considering the classification of a Deferred Tax Liability on a balance sheet, it is essential to assess the expected timeline for when the liability will be resolved. A Deferred Tax Liability represents a situation where a company has underpaid taxes but expects to pay them in future periods. This occurs due to differences in accounting practices for tax and financial reporting purposes. The key question is: If the Deferred Tax Liability is expected to be settled within the next year, as in this case by the first six months of 2015, how should it be classified?
Typically, liabilities on a balance sheet are categorized as either current or non-current. A current liability is one that is due within one financial year, while a non-current liability is due to be settled in a period longer than one year. Given that the liability in question is expected to be resolved within the first six months of 2015, it would be considered a current liability since it falls within the upcoming financial year.
Using the T-account, a visual representation often used in accounting to depict the balance sheet's structure, the Deferred Tax Liability would be transferred from the non-current liabilities section to the current liabilities section. The T-account is a useful tool that has a two-column format, providing an easy-to-understand representation of a company's financial standing, with assets on one side and liabilities on the other, mirroring the structural layout of a balance sheet.
However, deferred tax liabilities might not be as straightforward as other liabilities like a time deposit or accounts payable, because these amounts can fluctuate based on future tax rates, income levels, and legislation, all of which can impact the company's tax obligations in the future. Nonetheless, the basic principle of classifying the liability according to when it needs to be settled remains the primary factor for its classification on the balance sheet.
In conclusion, given that the Deferred Tax Liability is expected to be resolved within the first half of the next year, it should be reclassified as a current liability on the balance sheet for December 2014. This change in classification helps users of the financial statements understand the company's upcoming obligations and adds clarity to the company's financial future.