Life Cycle of a Deferred Tax Item
Response to the following problem:
Black Kitty Company recorded certain revenues of $10,000 and $20,000 on its books in 2007 and 2008, respectively. However, these revenues were not subject to income taxation until 2009. Company records reveal pretax financial accounting income and taxable income for the three-year period as follows:
Financial Income Taxable Income
2007.............................$44,000 $34,000
2008..............................38,000 18,000
2009..............................21,000 51,000
Assume Black Kitty's tax rate is 40% for all periods.
Required:
1. Determine the amount of income tax that will be paid each year from 2007 through 2009.
2. Determine the amount of income tax expense that will be reported on the income statement each year from 2007 through 2009.
3. Compute the amount of deferred tax liability that would be reported on the balance sheet at the end of each year.
4. Interpretive Question: Why would the IRS allow Black Kitty to defer payment of taxes on some of the revenue earned in 2007 and 2008?