Mountaineer Excavation operates in a low-lying area that is subject to heavy rains and flooding. Because of this, Mountaineer purchases one year of flood insurance in advance on March 1, paying $36,000 ($3,000/month). (1) Record the purchase of insurance in advance on March 1. (2) Record the adjusting entry on December 31. (3) Calculate the year-end adjusted balances of Prepaid Insurance and Insurance Expense (assuming the balance of Prepaid Insurance at the beginning of the year is $0).

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Deferred Tax

Deferred tax is an estimated future tax which is made while preparing accounts. It is estimated as a result of past and present transactions in the financial statements. It is not the actual tax which needs to be paid or refundable from the revenue authority, it is an accounting entry. It exists because of the difference between accounting profits and taxable profits.