Question

Times-Roman Publishing Company reports the following amounts in its first three years of operation:

($ in 000s)	2018			2019			2020
Pretax accounting income	$	360		$	340		$	330
Taxable income		400			350			370

  
The difference between pretax accounting income and taxable income is due to subscription revenue for one-year magazine subscriptions being reported for tax purposes in the year received, but reported in the income statement in later years when the performance obligation is satisfied. The income tax rate is 40% each year. Times-Roman anticipates profitable operations in the future.
  
Required:
1. What is the balance sheet account for which a temporary difference is created by this situation?
2. For each year, indicate the cumulative amount of the temporary difference at year-end. (Enter your answers in thousands.)
3. Determine the balance in the related deferred tax account at the end of each year. Is it a deferred tax asset or a deferred tax liability? (Enter your answers in thousands.)

Answer 1

Solution 1:

The balance sheet account is "Unearned subscription revenue" for which a temporary difference is created by this situation.

Solution 2:

Times Roman Publishing company
Computation of Cumulative Temporary differences at year end (In '000)
Year	Pre tax accounting income	Taxable Income	Deductible/(Taxable) temporary differences for the year	Cumulative temporary differences at year end
2018	$360.00	$400.00	$40.00	$40.00
2019	$340.00	$350.00	$10.00	$50.00
2020	$330.00	$370.00	$40.00	$90.00

Solution 3:

As these are deductible temporary differences, therefore these difference give rise to deferred tax assets:

Baalnce in deferred tax account at the end of each year:

2018 = $40 * 40% = $16

2019 = $50 * 40% = $20

2020 = $90*40% = $36