Detailed Answer
(c) The deferred tax liability reported at 12/31/Y1
results from future taxable (and possibly deductible) amounts
which exist as a result of past transactions, multiplied by the appropriate
tax rate. The nontaxable interest received on municipal
securities ($5,000) is a permanent difference that does not result
in future taxable or deductible amounts. The Codification
requires the netting of current deferred tax assets and liabilities,
and noncurrent deferred tax assets and liabilities. The future
deductible amount ($10,000) resulting from a loss accrual results
in a long-term deferred tax asset of $4,000 ($10,000 × 40%)
because it is related to a long-term loss accrual. The future taxable
amount ($25,000) caused by depreciation results in a longterm
deferred tax liability of $10,000 ($25,000 × 40%) because it
is related to a long-term asset (property, plant, and equipment).
Since these are both long-term, they are netted and a long-term
deferred tax liability of $6,000 is reported in the balance sheet
($10,000 liability less $4,000 asset).