(Accounting and Classification of Deferred Income Taxes)

Part A

This year Gumowski Company has each of the following items in its income statement.

1. Gross profits on installment sales.

2. Revenues on long-term construction contracts.

3. Estimated costs of product warranty contracts.

4. Premiums on officers’ life insurance policies with Gumowski as beneficiary.

(a) Under what conditions would deferred income taxes need to be reported in the financial statements?

(b) Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition.

Part B

Gumowski Company’s president has heard that deferred income taxes can be classified in different ways in the balance sheet.

Identify the conditions under which deferred income taxes would be classified as a noncurrent item in the balance sheet. What justification exists for such classification?

(AICPA adapted)