From book 7 #1AM In making adjustments to Fargo’s balance sheet related to the amount reported as a deferred tax liability, Scott should: A) Reclassify the entire amount as equity B) Include the entire amount as a liability C) Reclassify the PV of the deferrral as equity D) Include the PV of the deferral as a liability so long as the deferral is likely to reverse. Answer is D), but I chose A) I guess it was a little vague and I was assuming that it wouldn’t reverse. Am I correct in choosing that answer if it gave info saying that the DTL was NOT expected to reverse? That means we would have to add the full amount to equity, right? I’m still a little confused on this, thinking that you would reduce equity, but I’m trying to memorize it and just want to make sure I have it down right.
If it isn’t likely to reverse than you won’t have to use any cash to pay a tax liability in the future so you would increase equity by the amount of the DTL. PV is just an adjusment to see how much the DTL is today for a tax payment in the future.
Oi shite, that actually makes the most sense I’ve ever seen on this topic. Thanks bruv! I totally see why we would add it then. Cheers!