Question

(Deferred Income Taxes)

This year, a company has each of the following income statement items:

1. Gross profits on installment sales.
2. Revenues on long-term construction contracts.
3. Estimated costs of product warranty contracts.
4. Premiums on officers’ life insurance policies with the company as beneficiary.

Indicate where deferred income taxes are reported in the financial statements. Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition.

Answer 1

According to the question,

Deferred tax is reported on the balance sheet as asset and liabilities. The total of all deferred tax assets should be disclosed Companies should also disclose the types of temporary difference, carry forwards or carry backs that give rise to significant portions of deferred tax liabilities and assets

GRASS PROFITS ON INSTALLMENT SALES :-   

Gross profits on installment sales- assets may be recognized for
revenue /gains that will result in taxable amounts in future years when the
asset is recovered This is temporary difference and it gives rise to
recording deferred tax asset.
REVENUE ON LONG TERM CONSTRUCTION CONTRACT:-

Revenue from long term contract is taxable when they are recognized in financial income In this case, contract is accounted for under the percentage of completion method,fof financial reporting purpose and a portion of related grass profit deferred for tax purpose

ESTIMATED COST OF PRODUCT WARRANTY CONTRACTS:-

Estimated cost of production warranty is liability that may be recognized for expenses that will results will ductible amount in figure years when the liability is settled.this is also temporary difference.

PREMIUM ON OFFICER'S:-

Premium paid for officer's life insurance policy is a permanent difference and this will be recognized for financial reporting purpose but not for tax purpose

Deferred tax accounts are reported on the balance sheet as assets and liabilities.
Companies should classify these accounts as a net current amount and non current
amount. An individual deferred tax liability l asset is classified as current or non current based on the classification of the related asset of liability for financial reporting purpose.
The procedure of classification is as follows:
1 Classify the amounts as current or non current
2. Determine the net current amount
3. Determine the net non current amount

A deferred tax liability /asset that is not related to an asset or liability for financial
reporting, including carry forwards and carry losses, is classified according to the
expected reversal date of the temporary difference