B is corrent. For financial reporting purposes, income is recognized using the percentage-of completion method. For tax purposes, income is recognized using the completed-contract method. In year 1 and year 2, financial income exceeded taxable income resulting in a deferred tax liability. In year 3 , part of this temporary difference reversed; taxable income ($925,000) exceeded financial income ($825,000) by $100,000. This $100,000 amount is a reversal of a prior temporary difference, therefore, the deferred tax liability must decrease by the tax effect of the reversal or by $30,000 ($100,000 x 30%).
A is incorrect. For financial reporting purposes, income is recognized using the percentage-of completion method. For tax purposes, income is recognized using the completed-contract method. In year 1 and year 2, financial income exceeded taxable income resulting in a deferred tax liability. In year 3 , part of this temporary difference reversed; taxable income ($925,000) exceeded financial income ($825,000) by $100,000. This $100,000 amount is a reversal of a prior temporary difference, therefore, the deferred tax liability must decrease by the tax effect of the reversal or by $30,000 ($100,000 x 30%).
C is incorrect. For financial reporting purposes, income is recognized using the percentage-of completion method. For tax purposes, income is recognized using the completed-contract method. In year 1 and year 2, financial income exceeded taxable income resulting in a deferred tax liability. In year 3 , part of this temporary difference reversed; taxable income ($925,000) exceeded financial income ($825,000) by $100,000. This $100,000 amount is a reversal of a prior temporary difference, therefore, the deferred tax liability must decrease by the tax effect of the reversal or by $30,000 ($100,000 x 30%).
D is incorrect. For financial reporting purposes, income is recognized using the percentage-of completion method. For tax purposes, income is recognized using the completed-contract method. In year 1 and year 2, financial income exceeded taxable income resulting in a deferred tax liability. In year 3 , part of this temporary difference reversed; taxable income ($925,000) exceeded financial income ($825,000) by $100,000. This $100,000 amount is a reversal of a prior temporary difference, therefore, the deferred tax liability must decrease by the tax effect of the reversal or by $30,000 ($100,000 x 30%).
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