How Do Deferred Taxes Work?
Primrose Company appropriately uses the asset and liability method for interfered income tax allocation. Primrose reports depreciation expense for certain machinery purchased this year using MACRS for income tax purposes and the straight line basis for accounting purposes. The tax deduction is the larger amount this year. Primrose received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for accounting purposes, they are reported as unearned revenues, a current liability.
1. What is the theoretical basis for deferred income taxes under the asset and liability concept as specified by FASB Statement No. 109?
2. How would Primrose determine and account for the income tax effect for depreciation and rent? Why?