CFA Practice Question

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CFA Practice Question

A firm received magazine subscription revenue of $6,000 for next year from a corporate client. The firm treats this as unearned revenue for financial reporting purposes. It is taxed on a cash basis. The firm should ______

A. create a deferred tax asset of $6,000.
B. create a deferred tax liability of $6,000.
C. do nothing because this represents a permanent difference.
Correct Answer: A

The unearned revenue is a balance sheet liability. The carrying amount is $6,000 and the tax base is $0.

User Contributed Comments 13

User Comment
toyo I think DTA should be (6,000*tax rate), not 6,000.
JohnnyWu verdict?
charliedba NO. It's the gross taxable amount. It should be $6,000.
gill15 When the carrying amount is greater then the tax base it creates a deferred tax liability not an asset.
gill15 My bad...confused a little with this section.

DTL arises when carrying value of Asset > Tax Base OR
carrying value of Liability < tax base....

spent more time on taxes than any other section soo far in accounting.
phani78 It would create a deferred revenue of $6000 which would in turn lead to a deferred tax asset but we do not have additional information to determine the pre tax income.
Ifi2703 Think about it in this way - unearned revenue will be taxed immediately and that extra amount ($6k) is counted as part of the company's regular income by the taxman. So, essentially, the company is paying tax this year on $6k more of revenue that it wont have next year.
This means that for next year, the company will have this tax 'overpayment' as a DTA.
bidisha ifi your explanations have helped me a lot in this chapter
jonan203 so i took a walk to ponder this specific question and decided to share what i came up with...

since most companies use the accrual basis of accounting, they would pay taxes on this revenue regardless of the fact that they haven't received they haven't "earned" it yet

suppossed the revenue is realized in a subsequent year, since the tax was paid during the year prior there would be no tax due in the year current...

the tax paid during the prior year on unearned revenue becomes an asset that offsets any taxes due in the year the revenue is realized...

now i have to think about what would happen if rates were raised or lowered prior to the revenue being fully realized...

please feel free to correct me if i am wrong!
Seancfa1 Thank-you lfi and Jonan!
dbedford Your deferred tax asset is the amount that the IRS taxable amount is above what you reported on your books as being taxable.
Freddie33 Ifi is a tax maste
walterli Accounting Income would be more than Taxable income because it includes unearned revenue,so it taxed more so tax expense is more than tax payable, then it should be DTA.
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