[justgivemea75]

I cannot for the life of me understand why it isn’t B. I thought that the book income * enacted tax rate = income tax payable and that current income tax expense is tax income*enacted tax rate but they beg to differ.

In Year One, a company does work for a client and charges $500,000. The work is substantially completed in Year One. Of the total $500,000 amount, $200,000 is collected immediately with the remainder to be collected in Year Three. Accrual accounting is used for financial reporting purposes but the installment sales method is used for tax purposes so that the income is not taxed until collected. The enacted tax rate is 30 percent. The company paid no taxes during Year One. Which of the following is correct about the December 31, Year One balance sheet?

 A Income tax payable is $60,000 and deferred income tax liability is $90,000.

 B Income tax payable is $150,000.

 C Income tax payable is $90,000 and deferred income tax liability is $60,000.

 D Deferred income tax liability is $150,000.

FAR - 84
AUD - 76 (phew)
BEC - 88
REG - 77

DONE!

[Amay]

The answer should be A. 500k book (GAAP/accrual) income less 200K tax income = 300K temporary difference that will be a future tax liability (deferred tax liability). Only the 200K tax income will get taxed this year because that is the only amount collected this year.

200k X 30% = 60k current income tax payable (taxes due this year)

300k X 30% = 90k deferred income tax liability (taxes due in year 3, when the remainder will be collected)

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[Anonymous]

*A* should be the correct answer.

For cash receipts, my logic on DTA/DTL such as this problem is whether you're going to receive the cash now or defer to later. If you're going to defer to later you're going to have more income later which means you're going to have to pay more taxes. The enacted rate is the predicted tax rate that you're going to have in that “later” time frame.

[Anonymous]

Company pays taxes from taxable income, not book income

[Anonymous]

I think you should probably re-watch the lectures on deferred income taxes. It would be nice to be a little more comfortable with this material on test day. You might not see more than one multiple choice question related to it, but you might get hammered by it. You just never know.

[Author]

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