Chapter 10 Liabilities 459DEFERRED LIABILITIES
Deferred liabilities are created when a transaction delays or defers (1) the recognition
ofrevenueor (2) the payment of cash related to an expense. Thus, deferred liabilities are
classified as either deferred revenues or deferred expenses.Deferred Revenue
Deferred revenue, often referred to as unearned revenue, is created when cash is received
from a transaction prior to recording revenue. This occurs when a company receives
payment before providing the goods or services. These transactions are initially
recorded as liabilities and become revenue at a later
date when the company delivers the product or pro-
vides the service. For example, airlines often have
large amounts of deferred (unearned) revenues be-
cause plane tickets are typically paid for in full before
passengers take a flight. In this case, the airline does
not earn the revenue until the customer completes the
last leg of their flight. Other common examples of
deferred (unearned) revenues include tuition received
in advance by a school, magazine subscriptions re-
ceived in advance, and rent received at the beginning
of the period.Deferred Expense
A deferred expense arises when an expense is
recorded prior to the related cash payment. For ex-
ample, tax expense is often recorded before the cash payment for taxes is made to the
government. This occurs because the taxable incomeof a corporation is determined ac-
cording to the tax laws and is reported to taxing authorities on the corporation’s tax
return. Taxable income is often different from the income before income taxes reported
in the income statement according to generally accepted accounting principles. As a
result, the income tax based on taxable income (tax return) usually differs from the in-
come tax based on income before taxes (income statement), as shown in Exhibit 14.
To illustrate, assume that at the end of the first year of operations a corporation re-
ports $300,000 income before income taxes on its income statement. If we assume an
income tax rate of 40%, the income tax expense reported on the income statement is2007
Jan. 1 Cash 53,273
Discount on Bonds Payable 46,727
Bonds Payable 100,0002007
Dec. 31 Interest Expense ($46,727 5) 9,345
Discount on Bonds Payable 9,345The adjusting entry to record the interest expense on December 31, 2007, is as follows:Describe and illustrate
deferred liabilities related
to deferred revenue and
deferred taxes.
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