A friend says to you, “I don’t understand how taxable temporary differences can be ‘liabilities’ and how deductible temporary differences can be ‘assets.’ It seems to me that these temporary differences relate only to the future and that accounting is based on ‘historical cost.’ In addition, the government frequently changes the tax laws, so no one knows what the future tax laws will be.” Required: Prepare a written response for your friend that explains why deferred tax assets and deferred tax liabilities are recognized and reported on a corporation’s balance sheet. Include a discussion of a valuation allowance.

SWFT Comprehensive Vol 2020
43rd Edition
ISBN:9780357391723
Author:Maloney
Publisher:Maloney
Chapter1: An Introduction To Taxation And Understanding The Federal Tax Law
Section: Chapter Questions
Problem 41DQ
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A friend says to you, “I don’t understand how taxable temporary differences can be ‘liabilities’ and how deductible temporary differences can be ‘assets.’ It seems to me that these temporary differences relate only to the future and that accounting is based on ‘historical cost.’ In addition, the government frequently changes the tax laws, so no one knows what the future tax laws will be.”

Required:

  • Prepare a written response for your friend that explains why deferred tax assets and deferred tax liabilities are recognized and reported on a corporation’s balance sheet. Include a discussion of a valuation allowance.
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