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NINJA Question –
Hello (first post!)
Anyway, I’m preparing for my FAR exam coming up on Wednesday, and I remembered reading a few weeks ago about the changes to deferred taxes. In summary, it seems that now all temporary taxable differences will be reported as a single, noncurrent amount.
Sources:
PWC – Deferred Taxes Changes
2015 FASB Pronouncement for Deferred TaxesQuestion I got wrong:
At the end of 20X1, its first year of operations, Patch Co. has only one type of temporary difference—a $9,000 taxable temporary difference that is expected to reverse at the rate of $3,000 per year in each of the years 20X2–20X4. This temporary difference is not related to any specific asset or liability on the enterprise’s balance sheet. Assuming a 40% tax rate, Patch should report on its December 31, 20X1, balance sheet:
A. a $3,600 deferred tax liability classified as a current liability.
B. a $3,600 deferred tax liability classified as a noncurrent liability.
C. a $1,200 deferred tax liability classified as current and a $2,400 deferred tax liability classified as noncurrent.
D. a $1,200 deferred tax asset classified as current and a $2,400 deferred tax asset classified as noncurrent.You answered B. The correct answer is C.
The deferred tax asset or liability in this case will be a liability because the underlying temporary differences are taxable temporary differences. Since the deferred tax liability is not related to an asset or liability, it should be classified according to the reversal of the underlying temporary differences (FASB ASC 740-10-45-9).
Accordingly, since 1/3 ($3,000 of the $9,000 total) of the temporary differences reverse within the next year, 1/3 of the deferred tax liability should be classified as current, and 2/3 as noncurrent. The total deferred tax liability is 40% of $9,000 = $3,600. Therefore, $1,200 should be classified as a current liability and $2,400 as a noncurrent liability.
Please correct me if I am wrong, but wouldn’t the answer have changed from C to B under the new guidance? Or, am I misreading something? Which way should I be prepared to answer a similar question on Wednesday?
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