The cumulative temporary difference as of the end of 2021 is $40 million (also the future taxable amount). The enacted tax rate is 25%. What is the deferred tax asset or liability to be reported in the balance sheet

$10,000,000 - deferred tax liability

Explanation:

Deferred tax is not payable to the tax authorities but it is only an accounting entry to correct the mismatch between Income tax as per Income Tax Act and the Income tax Expense shown on the Face of the Statement of Profit and loss.

In our case, we have have a temporary situation which makes the company enjoy lower taxes now but somewhere in future, the situation will reverse itself -  future taxable amount.

So providing for the deferred tax now, we are making provision for the reversal of the situation in future - deferred tax liability.

Thus the deferred tax liability will be $10,000,000 that is $40,000,000 × 25%

explanation:

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