Question

Lincoln Company has the following four deferred tax items at December 31, 2017. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Temporary difference	Deferred tax asset	Deferred tax liability
Rent collected in advance: recognized when a performance obligation is satisfied for accounting purposes and when received for tax purposes.	\(652,000
Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes.		\)330,000
Recognition of income on installment sales at the time of sale for accounting purposes and during period of collection for tax purposes.		\(64,000
Warranty liabilities: recognized for accounting purposes at time of sale for tax purposes at time paid.	\)37,000

On Lincoln’s December 31, 2017, statement of financial position, it will report:

1. \(394,000 non-current deferred tax liability and \)689,000 non-current deferred tax asset.
2. \(330,000 non-current liability and \)625,000 current deferred tax asset.
3. \(295,000 non-current deferred tax asset.
4. \)295,000 current tax receivable.

Short answer

The business entity will report$295,000 as a non-current deferred tax asset.

Step-by-step solution

Definition of Deferred Tax Asset

The line item reported on the balance sheet of the business entity that contributes towards the reduction of the tax liability is known as deferred tax asset. Such asset is reported because of the difference between the accounting rules and the tax rules.

Explanation of correct option

The correct option is (c) $295 non-current deferred tax asset.

The net deferred tax asset will be reported as a non-current deferred tax asset because deferred tax asset will provide economic benefits in long-period rather than immediate benefits within operating period of the business entity.

Working note:

Particular	Amount $
Gross deferred tax asset	$689,000
Less: Gross deferred tax liability	(394,000)
Net deferred tax asset	$295,000

Explanation for incorrect options

1. Option (a) is incorrect because the deferred tax asset/liability is reported as a net amount in the non-current section of asset/liability.
2. Option (b) is incorrect because deferred tax assets/liability are not reported in the current section of the balance sheet.
3. Option (d) is incorrect because deferred tax assets/liabilities are not reported as receivable.