On December 31, 2020, XYZ Inc. has an account receivable of $2,000 for consulting fees it earned during the year. Consulting revenues are only taxable when collected. XYZ normally receives payment for the services rendered one month after the client is invoiced. Assuming a 20% tax rate, these revenues shall result in:
A) a deferred tax liability of $2,000.
B) a deferred tax liability of $400.
C) a deferred tax asset of $400.
D) a deferred tax asset of $2,000.

Question

Quizplus · Accepted Answer

The tax liability for consulting fees earned but not yet received is a deferred tax liability. At a 20% tax rate, the tax liability is $400 (20% of $2,000). Therefore, the answer is B, a deferred tax liability of $400.