Question

Times-Roman Publishing Company reports the following amounts in its first three years of operation:

($ in 000s) 2016 2017 2018
Pretax accounting income $250 $240 $230
Taxable income $290 $220 $260

The difference between pretax accounting income and taxable income is due to subscription revenue for one-year magazine subscriptions being reported for tax purposes in the year received, but reported in the income statement in later years when earned. The income tax rate is 40% each year. Times-Roman anticipates profitable operations in the future.

Required

1. What is the balance sheet account for which a temporary difference is created by this situation?

a. Earned subscription
b. Unearned subscription

2. For each year, indicate the cumulative amount of the temporary difference at year-end
3. Determine the balance in the related deferred tax account at the end of each year, Is it a deferred tax asset or a deferred tax liability?
4. How should the deferred tax amount be classified and reported in the balance sheet?

a. Noncurrent
b. Current

Answer 1

Unearned subscription

2016 deferred tax asset

2017 deferred tax liability

2018 deferred tax asset

Step-by-step explanation:

The balance sheet account is unearned subscription which is a liability account,

It is a liability because the company already collected cass but is yet to provide the necessary services paid for the by the customers.

Earned subscription account is sales revenue account which is a profit and loss item.

($'000) 2016 2017 2018

taxable income $290 $220 $260

Pretax accounting income ($250) ($240) ($230)

Deferred tax asset/(liability) $40 ($20) $30

When taxable income is more than pretax accounting income, the resulting effect is a deferred tax asset which shows that tax was charged on a higher taxable income which provides tax relief in future.

When pretax accounting income is higher,it implies that tax was calculated on a lower taxable income and that more tax would be incurred in the future when the temporary difference reverses.