Question

At year-end a landlord collected $200,000 of rent in advance for the next year. Rent received in advance is immediately taxable but not recognized as revenue for accounting (GAAP) purposes until the company fulfils its obligation. Which of the following is most accurate in the landlord’s books?

A) The tax base of this item is $200,000. B) The carrying amount of this item is $200,000. C) This results in the creation of a deferred tax liability of $200,000. D) This is an example of a balance sheet asset that results in the creation of a deferred tax liability.

Answer 1

As per the question given above, the landlord has already received the rent for the next year in advance for an anount of $200,000.

For the above given examples, the most appropriate would be D) This is an example of a balance sheet asset that results in the creation of a deferred tax Liability.

The option is the most appropriate because, the rent received by the landlord is for the next 12 months, which is received by him as an advance. Therefore, it will be proprotianed over 12 months in the books of accounts, also its tax liability will arise in the next year, when the same will be recorded in the books of accounts. Therefore, till the next year, it will be a Balance Sheet item as Advance Rent Received and also result in the creation of a deferred tax liability to match thge Balance Sheet.