QUESTIONS 45 THROUGH 68 RELATE TO FINANCIAL STATEMENT ANALYSIS

67. Assume U.S. GAAP (generally accepted accounting principles) applies unless

otherwise noted.

A company records the following two transactions:

I. €300,000 of rental revenue is received in advance on a two-year lease. It is taxed on

a cash basis, but deferred for accounting purposes.

II. €500,000 of installment sales. No payments are required for one year after which

collections will be made on an equal basis over 12 months and taxed on a cash basis.

The entire sale and related profit will be recognized for financial reporting purposes

in the year of sale.

Which of the above transactions will most likely give rise to a deferred tax

liability on the balance sheet?

A. I only.

B. II only.

C. Both I and II.