Question

Part B: Gumowski Company’s president has heard that deferred income taxes can be classified in different ways in the balance sheet

Instructions

Identify the conditions under which deferred income taxes would be classified as a noncurrent item in the balance sheet. What justification exists for such classification?

Short answer

Net deferred tax assets or liability accounts lead to inflow or outflow of benefits over the long run. Therefore, they are reported as non-current items.

Step-by-step solution

Definition of Income Tax

Income tax can be defined as the fees paid by the earnings individual or business entity to the government or taxation authority. Such fees are paid as a specific percentage of the income earned above the limits established by the government.

Conditions under which deferred income tax will be recorded as a non-current item in the balance sheet

A deferred tax account is either an asset or a liability. This account is reported as a non-current item on the balance sheet because it will lead to inflow or outflow of benefits over a long period. The business entity first recognizes deferred tax assets and deferred tax liabilities separately. Both of these are offset against each other, and then thenet deferred tax asset/net deferred tax liabilityisreported in the non-current section of the balance sheet.