Question

What does the current portion of long term debt represent? In periods of rising prices, which inventory method (LIFO or FIFO) will provide you with a higher net income? Record the journal entry to write off $4,000 of receivables that were deemed uncollectible assume that $500 of the receivables written off in were subsequently collected record the journal entry to record the collection of the $500. What does a deferred tax liability represent? What does a deferred tax asset represent?

Answer 1

Ans:

1.

Current protion of long term debt represts the amount of long term debt repayable in next 12 months. Suppose we have $400,000 outstanding for long term debt and out of which $50,000 is to be paid in next financial year. So current protion on long term debt will be $50,000 and non current will be $350,000.

2.

In case of rising prices, FIFO method will report higher income than LIFO Method, because in FIFO method stock bought before are are sold earlier so high price stocks bought in the end will continue to appear in inventory. Which will report higher income than in LIFO method in case of prices rising, because in LIFO method inventory will contain stock bought earlier which carries lower value.

3.

Journal for writeoff receivable:

Bad Debts Written off expense Debit $4,000

To Receivables Credit $4,000

4.

Journal for collecting written off receivables:

Cash Debit $500

To Bad debts recovered Credit   $500

(To report the bad debt recovered as income, because already written off as expense)

5.

Deferred tax liability means company's having tax liability as per income tax rules is less than what provided in the books of accounts. So company will have to pay that tax when this income will be recognised as per income tax rules.

6.

Deferred tax assets means company's having tax liability as per income tax rules is more than what provided in the books of accounts. So company will have benifits of the tax paid as per income tax rules in future. It means where tax as per books is $500 but as per income tax act due to certain non allowances in that particular financial year is $600, so now when these expenses will be allowable as per income tax Act. Tax liability for that year will correspondingly reduced by $100 as per income tax rules.