Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year.

Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability.

Instructions

a. What are the principles of the asset-liability approach?

b. How would Dexter account for the temporary differences?

c. How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?