Deferred Income Tax Account

D

The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes.

The correct answer is D. The deferred income tax account is where the difference between income tax expense and income tax payable is reconciled.

Deferred income tax arises due to temporary differences between the accounting treatment of certain items and their tax treatment. These temporary differences result in variations between the income tax expense recognized in the financial statements and the actual tax liability that will be payable to the tax authorities.

To understand the deferred income tax account, let's break down the options and explain why each answer is incorrect:

A. None of these answers: This option suggests that none of the provided answers is correct. However, one of the options is indeed correct, as mentioned above.

B. Is always reported as a long-term liability since the tax is not due until the next fiscal year: This answer is incorrect. The classification of the deferred income tax account depends on the timing of the temporary differences. Some temporary differences are classified as current, while others are classified as non-current (long-term). The classification is based on when the temporary differences are expected to reverse and when the resulting tax impact is expected to be settled.

C. Is reported as an other asset even though it has a credit balance: This answer is incorrect. The deferred income tax account is not reported as an asset. It represents the cumulative balance of temporary differences between taxable income and accounting income. Temporary differences can be either deferred tax assets or deferred tax liabilities, depending on whether they result in future tax savings or future tax payments. The deferred tax assets and liabilities are presented separately on the balance sheet.

D. Is where the difference between income tax expense and income tax payable is reconciled: This answer is correct. The deferred income tax account acts as a reconciliation between the income tax expense reported in the income statement and the income tax payable reported on the balance sheet. It represents the cumulative impact of temporary differences that will result in future tax payments or tax savings. The account is used to recognize the tax consequences of these temporary differences and ensure proper reporting of income taxes.

In summary, the deferred income tax account is not classified as a long-term liability or an asset. It serves as a reconciliation between income tax expense and income tax payable, reflecting the cumulative impact of temporary differences between accounting and tax treatments.