Question

At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be recognized in the income statement in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a: Multiple Choice Noncurrent deferred tax liability. Noncurrent deferred tax asset. Current deferred tax liability. Current deferred tax asset.

Answer 1

In the balance sheet of Newsmax Inc., one would expect to find a current deferred tax liability in relation to the $400,000 subscriptions received in advance that will be recognized in the income statement in the following year.

Step-by-step explanation:

Given the scenario, where Newsmax Inc. has subscriptions received in advance, this creates a liability because the service has not yet been provided even though the payment has been received. As per the income statement disclosure, the entirety of the $400,000 will be recognized as revenue in the next fiscal year, meaning it is unearned revenue as of the current year. In accounting terms, this is seen as a deferred revenue and is a liability as Newsmax owes the service to its subscribers.

Since the revenue is planned to be recognized in the next year, it falls within one fiscal year, hence it should be classified as a current liability. The temporary difference between accounting (revenue recognized when earned) and tax purposes (revenue recognized when cash is received) would not create a deferred tax asset because the company has received the cash and is likely to pay tax on it. Instead, this creates a current deferred tax liability, reflecting the taxes that will be paid on this revenue in the future when it is recognized for accounting purposes. Therefore, the balance sheet would show a current deferred tax liability.