Question

Chelsea Inc. reports tax revenues (income) using the installment method (cash basis), but reports book revenues on an accrual basis. As a result, it has a book-tax difference in that it is recording book revenues prior to recording tax revenues (income). Assume the tax rate is 40%

Chelsea INC. GAAP Reporting

	2014	2015	2016	Total
Revenues	130000	130000	130000
Expenses	60000	60000	60000
Pretax Financial Income	70000	70000	70000	210000
Income Tax Expense (40%)	28000	28000	28000	84000

Chelsea INC. Tax Reporting

	2014	2015	2016	Total
Revenues	100000	150000	140000
Expenses	60000	60000	60000
Taxable Income	40000	90000	80000	210000
Income Taxes Payable (40%)	16000	36000	32000	84000

Based on the information provided, complete the following charts and answer the related questions:

GAAP versus Tax Reporting

		GAAP Versus Tax Reporting
	2014	2015	2016	Total
GAAP Revenues
Tax Revenues
Book-Tax Difference

	Income	Expense and	Income Tax	Payable Reporting
	2014	2015	2016	Total
Income Tax Expense
Income Tax Payable
Book-Tax Difference

A) In this situation, do GAAP Revenues and Tax Revenues in 2014 reverse out in future years? YES / NO

B) In this situation, the differences result in a deferred tax liability. Which of the following statements below best describes why?

a. The difference is temporary and results in a future tax obligation

b. The difference is temporary and results in a future tax benefit

c. The difference is permanent and results in a future tax obligation

d. The difference is permanent and results in a future tax benefit

C) How much will be reported for the deferred tax liability at the end of each of the following three years:

2014: ___________________

2015: ___________________

2016: ___________________

Answer 1

Under GAP reporting	2014	2015	2016	Total
Revenues	130000	130000	130000
Expenses	60000	60000	60000
Pretax Financial Income	70000	70000	70000	210000
Income Tax Expense (40%)	28000	28000	28000	84000
Under INC. Tax reporting	2014	2015	2016	Total
Revenues	100000	150000	140000
Expenses	60000	60000	60000
Taxable Income	40000	90000	80000	210000
Income Taxes Payable (40%)	16000	36000	32000	84000
GAAP versus Tax reporting	2014	2015	2016	Total
GAAP revenues	130000	130000	130000	390000
Tax revenues	100000	150000	140000	390000
Book-Tax difference	30000	-20000	-10000	0
Income tax expense and payable reporting	2014	2015	2016	Total
Income Tax expense	28000	28000	28000	84000
Income tax payable	16000	36000	32000	84000
Book-Tax difference	12000	-8000	-4000	0

A -Yes. The GAAP revenues and Tax revenues reverse out in the future. In the given situation the revenues are reported in books prior to reporting the same for tax purposes. This results in a temporary timing difference which will be reversed in future years

B - a. The difference is temporary as it is just a timing difference. As the tax revenues reported are lower than GAAP revenues, the income under taxes is lower and hence, results in future tax obligation

C - Amounts of DTL:
2014: 12000
2015: -8000
2016: -4000