- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 24. Income Taxes
- Subject 3. Determining the Tax Base of Assets and Liabilities
CFA Practice Question
An insurance company received prepaid insurance revenue of $10,000 for next year from a local construction firm. The insurance company treats this as unearned revenue for financial reporting purposes. The local tax legislation requires that $8,000 be treated as taxable income for the current year. As a result, a ______ should be created.
A. deferred tax liability of $8,000
B. deferred tax liability of $2,000
C. deferred tax asset of $8,000
Explanation: The carrying amount and tax base of the liability are $10,000 and $2,000, respectively.
User Contributed Comments 8
| User | Comment |
|---|---|
| TheHTrader | Can't get this straight according to: "The tax base of such a liability (unearned revenue) is the carrying amount less any amount of the revenue that will not be taxable in future." - shouldn't the tax base be $8,000 in this case? |
| carst | so $8000 is the amount of the revenue that will be taxed this year and not to be taxable in the future. Tax base = 10000 - 8000 = 2000. |
| czar | unearned revenue: goes on the BS not the Income Stmt. hence no impact of the 10000 un earned revenue on pre-tax income this year. however, you are paying tax on 8000 this year, which you wont have to pay when then 10,000 comes on the Income stmt. you will have to pay for the 2000 (not yet pd) hence 8000 becomes our DTA (already paid taxes on this) |
| teje | shouldn't the DTA be 8000*tax rate? |
| NickNT | Agree with teje |
| dini85 | For financial reporting zero revenue is report bcos its unearned and for tax reporting 8k is reported as revenue.. so DTA for 8K.. Correct me if am wrong.. |
| alles | DTA created should be 8000*tax rate |
| CJPerugini | If these questions didn't have a comments section I would be pretty pissed off. DTA = 8000*t. The answer would be $8000 if it was the difference in taxes payable and tax expense. |