On December 31, 2017, 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

Since the consulting fees are only taxable when collected, the tax liability will be deferred until the payment is received. Since XYZ normally receives payment one month after invoicing, the collection of these fees will most likely occur in January. Therefore, the deferred tax liability will be $2,000 * 20% = $400.