How should deferred taxes be presented on the balance sheet according to generally accepted accounting principles (GAAP)?

• A. Excluded from the balance sheet and disclosed only in the notes
• B. Only as a net amount under non-current liabilities
• C. As separate line items for deferred tax assets and deferred tax liabilities
• D. Combined with current income tax payable

Answer: (C)

Verified step by step guidance

1. Understand the concept of deferred taxes: Deferred taxes arise due to temporary differences between the accounting income reported on the financial statements and the taxable income reported to tax authorities. These differences result in deferred tax assets or liabilities.
2. Review GAAP requirements for balance sheet presentation: According to GAAP, deferred tax assets and deferred tax liabilities must be presented as separate line items on the balance sheet. This ensures transparency and clarity for users of financial statements.
3. Classify deferred tax assets and liabilities: Deferred tax assets represent amounts that can reduce future taxable income, while deferred tax liabilities represent amounts that will increase future taxable income.
4. Determine the classification as current or non-current: GAAP requires deferred tax assets and liabilities to be classified as non-current items, regardless of their expected realization or settlement within the operating cycle.
5. Ensure proper disclosure: In addition to presenting deferred tax assets and liabilities as separate line items, GAAP requires detailed disclosures in the notes to the financial statements, explaining the nature of the temporary differences and any valuation allowances applied to deferred tax assets.