Primrose Co. uses the deferred method for interperiod tax allocation. Primrose reports depreciation expense for machinery purchases for the current year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting. The tax deduction is the larger amount this year. Primrose also received rent revenues in advance this year. It included these revenues in this year’s taxable income. For financial reporting, rent revenues are reported as unearned revenues, a current liability.

Required:

a. What is the conceptual underpinning for deferred income taxes?

b. How does Primrose determine and account for the income tax effect for both depreciation and rent? Explain.

c. How does Primrose classify the income tax effect of both depreciation and rent on its balance sheet and income statement? Explain.