Question

NewsMonth has $10,000,000 of Deferred revenue-subscriptions. NewMonth recognizes income for tax purposes when cash is collected, and pays tax at a rate of 35%. NewsMonth's balance sheet should include a:

a. deferred tax asset of $3,500,000.
b. Deferred tax asset of $6,500,000.
c. Deferred tax liability of $3,500,000.
d. Deferred tax liability of $6,500,000.

Answer 1

NewsMonth should include a deferred tax liability of $3,500,000 on its balance sheet.

Step-by-step explanation:

NewsMonth should include a deferred tax liability of $3,500,000 (option c) on its balance sheet.

Deferred revenue is money that has been collected in advance for goods or services that have not yet been provided. In this case, NewsMonth has $10,000,000 of deferred revenue from subscriptions. When NewsMonth recognizes income for tax purposes, it will be required to pay tax at a rate of 35%.

Therefore, NewsMonth will need to account for the deferred tax liability on its balance sheet. The deferred tax liability represents the estimated amount of tax that NewsMonth will eventually have to pay when it recognizes the revenue. In this case, the amount of the deferred tax liability will be $10,000,000 * 35% = $3,500,000.