Required: For each of these scenarios described below, answer the following ques

Question

Required: For each of these scenarios described below, answer the following question:

1. Does the situation result in taxable temporary difference or a deductible temporary difference?

2. Does the temporary difference produce a deferred tax asset or deferred tax liability?

3.From what specific balance sheet asset or liability account is the temporary difference calculated?

Scenario 1: XYZ was incorporated and began business this year, for tax purposes, it capitalized organization costs which are amortizable over 15 years. For book purposes, the organization costs were expensed.

Scenario 2: On 31 December, XYZ received an advance payment of two years of rental income from a tenant in one of its commercial buildings. For book purposes, the payment was recorded as unearned revenue and will be reported as income when earned over the next two years.

Explanation / Answer

Scenario 1

This Situation result in a deductible temporary difference since the amount will be deducted in the future when determining taxable profit or loss.

The above temporary difference produce a deferred tax asset since accounting Income is less than taxable income

This amount will appear as Intangible asset in tax books on which the temporary difference is calculated.

Scenario 2:

This Situation result in a deductible temporary difference since the amount will be deducted in the future when determining taxable profit or loss.

The above temporary difference produce a deferred tax asset since accounting Income is less than taxable income

This amount will appear as unearned revenue liability in accounting books on which the temporary difference is calculated.

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