Question

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (b) How would Dexter account for the temporary differences?

Short answer

Rent is the type of expenditure incurred by the organization for the land or machinery used to produce goods and servicesto its owner.

Step-by-step solution

Introduction

Every organization faces a difference in the amounts as per the accounting principles used and the income tax law while estimating the income tax expense. The following procedure can be followed to account for the correct amount of temporary difference.

Temporary differences

Dexter can account for the temporary difference by following the procedure as

(1) By identifying the nature and the amount of temporary differences of the current year. If an organization has a depreciating asset, it will affect the amount of temporary difference.

(2) Identifying the amount of the organization's deductibles.

(3) By measuring the amount of deferred tax asset and liability with its respective effective tax rate.

(4) Preparing the valuation account to decrease the amount of deferred tax assets.