B is corrent because, per ASC Topic 740, a deferred tax liability is recognized for temporary differences that will result in net taxable amounts (taxable income exceeds book income) in future years. Although Cody Co. has recognized a loss (per books) in year 2 of the construction contract, the contract is still profitable over the 3 years. Therefore, in year 3 when the contract is completed, Cody will recognize the total profit on its tax return while only a portion of the profit will be recorded on its income statement. Thus, the contract will result in a taxable amount in year 3 and a deferred tax liability exists. Note that this liability was recorded at the end of year 1 and reduced by one-half at the end of year 2 due to a change in estimated profit.
A is incorrect. Per ASC Topic 740, a deferred tax liability is recognized for temporary differences that will result in net taxable amounts (taxable income exceeds book income) in future years. Although Cody Co. has recognized a loss (per books) in year 2 of the construction contract, the contract is still profitable over the 3 years. Therefore, in year 3 when the contract is completed, Cody will recognize the total profit on its tax return while only a portion of the profit will be recorded on its income statement. Thus, the contract will result in a taxable amount in year 3 and a deferred tax liability exists. Note that this liability was recorded at the end of year 1 and reduced by one-half at the end of year 2 due to a change in estimated profit.
C is incorrect. Per ASC Topic 740, a deferred tax liability is recognized for temporary differences that will result in net taxable amounts (taxable income exceeds book income) in future years. Although Cody Co. has recognized a loss (per books) in year 2 of the construction contract, the contract is still profitable over the 3 years. Therefore, in year 3 when the contract is completed, Cody will recognize the total profit on its tax return while only a portion of the profit will be recorded on its income statement. Thus, the contract will result in a taxable amount in year 3 and a deferred tax liability exists. Note that this liability was recorded at the end of year 1 and reduced by one-half at the end of year 2 due to a change in estimated profit.
D is incorrect. Per ASC Topic 740, a deferred tax liability is recognized for temporary differences that will result in net taxable amounts (taxable income exceeds book income) in future years. Although Cody Co. has recognized a loss (per books) in year 2 of the construction contract, the contract is still profitable over the 3 years. Therefore, in year 3 when the contract is completed, Cody will recognize the total profit on its tax return while only a portion of the profit will be recorded on its income statement. Thus, the contract will result in a taxable amount in year 3 and a deferred tax liability exists. Note that this liability was recorded at the end of year 1 and reduced by one-half at the end of year 2 due to a change in estimated profit.
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