- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 27. Income Taxes
- Subject 5. Recognition and Measurement of Current and Deferred Tax
CFA Practice Question
In 2015, Taylor Company received $240,000 rent in advance. For income tax purposes, all of the $240,000 was included in taxable income. However, for financial reporting purposes, only $60,000 was included in the pretax financial income. The tax effects of the $180,000 difference affect income tax liability, the deferred tax asset, and the deferred tax liability, respectively, in the following ways for 2015: ______.
A. increase; increase; no effect
B. no effect; increase; no effect
C. increase; no effect; increase
Explanation: Current taxable income is greater than current financial income. This recognition of revenue for tax purposes before financial purposes will result in a deferred tax asset being recognized. The income tax liability will increase because taxable income is greater. There is no effect on a deferred tax liability.
User Contributed Comments 7
| User | Comment |
|---|---|
| kalps | (1) Future taxable income will be lower therefore deferred tax assets (2) Taxable income higher this year therefore higher IT liability |
| shasha | income tax Liability = tax payable? another name for tax payable? income tax Expense = tax payable + deferred tax liability - deferred tax asset |
| gene80 | sigh.. received cash in advance! Gotta read closer into the question! |
| jackwez | revenue not expense... damn it.. good question |
| boddunah | rent received in advance, interest received in advance are included in taxable income in the period it is received. |
| JeremyMartin | is income tax liability and tax payable same? please advice |
| davcer | you receive rent in advance, so for tax purposes the 240,000 are included in taxable income this period, so you have a DTA |