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Question: (Three Differences, Classify Deferred Taxes) At December 31, 2016, Belmont Company had a net deferred tax liability of \(375,000. An explanation of the items that compose this balance is as follows

Temporary differences	Resulting balance in deferred taxes
Excess of tax depreciation over book depreciation	\)200,000
Accruals, for book purpose, of estimated loss contingency from pending lawsuit that is expected to be settled in 2017. The loss will be deducted on the tax return when paid	(50,000)
Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment	225,000
	\(375,000

In analyzing the temporary differences, you find that \)30,000 of the depreciation temporary difference will reverse in 2017, and $120,000 of the temporary difference due to the installment sale will reverse in 2017. The tax rate for all years is 40%.

Instructions

Indicate the manner in which deferred taxes should be presented on Belmont Company鈥檚 December 31, 2016, balance sheet.

Step by step solution

01

 Step 1: Meaning of Deferred Tax

Deferred tax is a tax imposed on companies, either deducted in advance or is eligible for an adjustment in future periods. It may be either a deferred tax asset or liability.

02

Clasification of deferred tax account

Step 5: Clasification of deferred tax account

Resulting Deferred tax
Temporary difference	(Asset)	Liability
Depreciation		$200,000
Lawsuit obligation	($50,000)
Installment sale		$225,000
Totals	($50,000)	$425,000

The deferred tax assets are ($50,000), and the deferred tax liability is $425,000, so the net deferred tax liability is $375,000.

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