# ASC 740-980: Income Taxes — Regulated Operations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/740/980/) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:21:36.471Z to 2026-09-10T01:21:55.089Z Record version: sha256:43694f28914a2f1163ff627b03843e47b695e5849822226c3e7fbf7a2da46804 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-980: Income Taxes — Regulated Operations ### Machine-generated study aids ```json { "summary": "This subtopic applies ASC 740 to entities whose rates are regulated and that meet the criteria in 980-10-15-2. It prohibits net-of-tax accounting, requires a deferred tax liability for tax benefits flowed through to customers and for the equity component of the allowance for funds used during construction (AFUDC), and requires deferred taxes to be adjusted for enacted changes in tax law or rates. When it is probable that a regulator will allow recovery from (or require refund to) customers of those future tax amounts, the entity recognizes a separate regulatory asset or liability, which is itself a temporary difference generating additional deferred tax.", "key_points": [ "For entities meeting paragraph 980-10-15-2, net-of-tax accounting and reporting is prohibited, a deferred tax liability must be recognized for tax benefits flowed through to customers when temporary differences originate and for the equity component of AFUDC, and deferred tax liabilities/assets must be adjusted for enacted changes in tax laws or rates (740-980-25-1).", "If regulator action makes it probable the future increase or decrease in taxes payable will be recovered from or returned to customers through future rates, a regulatory asset or liability is recognized under 980-340-25-1 and 980-405-25-1, and that asset or liability is itself a temporary difference requiring a deferred tax liability or asset (740-980-25-2).", "The regulatory asset and the related deferred tax liability are displayed separately and are not offset for general-purpose financial reporting (740-980-55-1).", "The regulatory asset is grossed up for the tax on the recovery itself: 34% x ($26,000 AFUDC equity + A) = A, giving A = $13,394 (740-980-55-9).", "Where the deferred tax liability represents amounts already collected from customers, no regulatory asset exists; a rate-rate decrease creates a probable refund liability grossed up as $4,000 + (30% x R) = R, so R = $5,714 (740-980-55-13).", "A regulated entity capitalizes an otherwise-expensed cost only if future revenue at least equal to the cost is probable from including it in allowable costs, and the evidence shows the revenue recovers the previously incurred cost rather than funding similar future costs (740-980-55-1).", "For an abandoned plant, the abandonment loss is deductible for federal tax purposes when abandonment occurs regardless of rate-making treatment, and deferred taxes on the remaining asset and related recovery asset are recorded under Subtopic 740-10 (740-980-55-4 through 55-6)." ], "categories": [ "Income taxes", "Industry-specific", "Recognition", "Subsequent measurement" ], "audience_level": "advanced", "student_note": "Exam questions here hinge on the gross-up math: because the regulatory asset (or refund liability) is itself taxable/deductible, you must solve the circular equation rather than simply multiplying the tax rate by the AFUDC equity amount. A common misunderstanding is netting the regulatory asset against the deferred tax liability — the guidance requires separate display and forbids net-of-tax presentation.", "related_topics": [ "980-10", "980-340", "980-405", "980-360", "980-740", "740-10" ], "key_concepts": [ "regulated operations", "allowance for funds used during construction", "flow-through tax benefits", "regulatory asset", "regulatory liability", "deferred tax liability", "enacted tax rate change", "net-of-tax accounting prohibition" ] } ``` Source downloaded (UTC): 2026-09-10T01:21:36.471Z to 2026-09-10T01:21:36.471Z Record version: sha256:9fdba3d05b2c0d2bd26ff7b7ef8e40f2dfc8a0ba1b7ee27db7d21120bc5dfc3c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-980-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/740/980/#05-overview-and-background) SEC content: no ##### [740-980-05-1](https://asc.understandingaccounting.org/asc/740/980/#740-980-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:36.471Z to 2026-09-10T01:21:36.471Z Record version: sha256:c614321f9448e9ce723b93f1c5b4095642c5f8b0d8fdc91dad89c121f9bd9745 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides guidance on accounting for income taxes for entities with regulated operations. Source downloaded (UTC): 2026-09-10T01:21:40.547Z to 2026-09-10T01:21:40.547Z Record version: sha256:8a46131095565c29282548993c0e22fb486b2dd0ca89d9e1540a7fd2f3568bad Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-980-15: 15 Scope and Scope Exceptions [Read section](https://asc.understandingaccounting.org/asc/740/980/#15-scope-and-scope-exceptions) SEC content: no #### Overall Guidance ##### [740-980-15-1](https://asc.understandingaccounting.org/asc/740/980/#740-980-15-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:40.547Z to 2026-09-10T01:21:40.547Z Record version: sha256:cc523edd502edbdb140c2d04f0d75a37b7550eca44b49aec511cfe154b707ad4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 980-10-15. Source downloaded (UTC): 2026-09-10T01:21:48.440Z to 2026-09-10T01:21:48.440Z Record version: sha256:49b01d59145fe6b6b17dfe724e33d0b28c0b2dd0412a03f16c87416bb7021ba6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-980-25: 25 Recognition [Read section](https://asc.understandingaccounting.org/asc/740/980/#25-recognition) SEC content: no #### Income Taxes Applicable to Regulated Entities ##### [740-980-25-1](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:48.440Z to 2026-09-10T01:21:48.440Z Record version: sha256:5f1824cdfbf4a81f51947f5e44170920c6ba881c6fb64ecec43d224e26b0237d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For regulated entities that meet the criteria for application of paragraph [980-10-15-2](https://asc.understandingaccounting.org/asc/980/10/#980-10-15-2), this Subtopic specifically: 1. a Prohibits net-of-tax accounting and reporting 2. b Requires recognition of a deferred tax liability for tax benefits that are flowed through to customers when temporary differences originate and for the equity component of the [allowance for funds used during construction](https://asc.understandingaccounting.org/glossary/a/#allowance-for-funds-used-during-construction "The cost of financing construction as financed partially by borrowings and partially by equity, capitalized as part of the cost of plant and equipment pursuant to requirements of the regulator.") 3. c Requires adjustment of a deferred tax liability or asset for an enacted change in tax laws or rates. ##### [740-980-25-2](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:48.440Z to 2026-09-10T01:21:48.440Z Record version: sha256:2995c1db8fb6f053f4f85e4a8aabe3134b2504477267638da1f2f569dd7ee3f0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If, as a result of an action by a regulator, it is probable that the future increase or decrease in taxes payable for (b) and (c) in the preceding paragraph will be recovered from or returned to customers through future rates, an asset or liability shall be recognized for that probable future revenue or reduction in future revenue pursuant to paragraphs [980-340-25-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-1) and [980-405-25-1](https://asc.understandingaccounting.org/asc/405/980/#405-980-25-1). That asset or liability also shall be a temporary difference for which a deferred tax liability or asset shall be recognized. ##### [740-980-25-3](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:48.440Z to 2026-09-10T01:21:48.440Z Record version: sha256:e520474913ed8fc891ae32828b0e1e939d05dddff787ec92f57b2c57b3dc9e6c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 1 (see paragraph [980-740-55-8](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-8)) illustrates recognition of an asset for the probable revenue to recover future income taxes. ##### [740-980-25-4](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:48.440Z to 2026-09-10T01:21:48.440Z Record version: sha256:71170d522c60248dc382455d1baf6295bdbaa75adb1439567fe771ed9f11f3bb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 2 (see paragraph [980-740-55-13](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-13)) illustrates adjustment of a deferred tax liability when the liability represents amounts already collected from customers. Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:9618d567e1b0ca1c29c6ef17d477a03116cb1d2aa92223438434341582d813d1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-980-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/740/980/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [740-980-55-1](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:3941b32b238badd60baed3a4968f3f6e96928a849aaa5b4fb748c3211f3d974c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [980-340-25-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-1) requires a regulated entity that applies this Topic to [capitalize](https://asc.understandingaccounting.org/glossary/c/#capitalize "Capitalize is used to indicate that the cost would be recorded as the cost of an asset. That procedure is often referred to as deferring a cost, and the resulting asset is sometimes described as a deferred cost.") an [incurred cost](https://asc.understandingaccounting.org/glossary/i/#incurred-cost "A cost arising from cash paid out or obligation to pay for an acquired asset or service, a loss from any cause that has been sustained and has been or must be paid for.") that would otherwise be charged to expense if the following criteria are met: 1. a It is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in [allowable costs](https://asc.understandingaccounting.org/glossary/a/#allowable-costs "All costs for which revenue is intended to provide recovery. Those costs can be actual or estimated. In that context, allowable costs include interest cost and amounts provided for earnings on shareholders' investments.") for rate-making purposes. 2. b Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of similar future costs. If the income taxes that result from recording a deferred tax liability in accordance with Subtopic 740-10 meet those criteria, an asset is recognized for those income taxes when the deferred tax liability is recognized. That asset and the deferred tax liability are not offset for general-purpose financial reporting; rather, each is displayed separately. ##### [740-980-55-2](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:862a37edc5f0c5309ce30f0a60bcc07493ce962810117364c31d23e4d484dc73 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When a loss on abandonment is recognized, the amount of deferred income taxes related to the remaining asset shall be determined as indicated in the following guidance. ##### [740-980-55-3](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:1bfb87140aa9657382a2b960d1db699c4879da9ff84f8dcf3a049d264a870673 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. While under construction, a utility's plant has a recorded cost that consists of the following three separate elements for income tax purposes: 1. a Costs that will be deductible in the future, either as depreciation or (in the event that the plant is abandoned) as an abandonment loss 2. b Costs that have been deducted in the past 3. c Costs that are never deductible (the [allowance for equity funds used during construction](https://asc.understandingaccounting.org/glossary/a/#allowance-for-funds-used-during-construction "The cost of financing construction as financed partially by borrowings and partially by equity, capitalized as part of the cost of plant and equipment pursuant to requirements of the regulator.")). ##### [740-980-55-4](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:7a39c3f20a955eddb25866b441cf804e1824405440a6715a20c32e6df544593b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An abandonment loss generally is deductible for federal income tax purposes when the abandonment occurs. That tax deduction is allowed without regard to the rate-making treatment applied to the recorded cost of the abandoned plant. ##### [740-980-55-5](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:6a5bf00f036bbc6d86cdee93b2d444e9f50433c1b6f6395fad6d51c1ea6bf5c2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When a regulator is expected to provide recovery of the cost of an abandoned plant without return on investment, Subtopic 980-360 requires a portion of the cost of the abandoned plant to be recognized as a loss, equivalent to the present value of the effective disallowance of return on investment. ##### [740-980-55-6](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:8f6df4ac3d09f9f7267b27f460717c8e27cf1af1f4678014c4bd127cfa21a731 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Deferred income tax liabilities, related to the remaining asset and the recovery of a separate asset recognized to reflect the future revenue that is expected to be provided in rates by the regulator when the income taxes become payable, shall be recorded under the requirements of Subtopic 740-10. #### Illustrations ##### [740-980-55-7](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:480e5237639ff5d37ee9c1cd5c8bf9ed3cb2224f919d96c4204fe6df86788a55 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All the Examples assume that the entity meets the criteria in paragraph [980-10-15-2](https://asc.understandingaccounting.org/asc/980/10/#980-10-15-2) for the application of this Topic by the entity. ##### [740-980-55-8](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:f64fd367e6b32b61e923bc86d3384f7c872d4ed23cdfa4a6550beff801bfc7d9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [980-740-25-1 through 25-2](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-1) . The following Cases illustrate the recognition of an asset related to a deferred tax liability: 1. a Recognition of an asset for the probable future revenue to recover future income taxes related to the deferred tax liability for the equity component of the allowance for funds used during construction (Case A) 2. b A subsequent adjustment of deferred tax liability for an enacted change in tax rates (Case B). ##### [740-980-55-9](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:9e846a4f31411043bb051e5ff92e030108dbf3eb0dc66f637f8f9ae904b90547 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share all of the following assumptions: 1. a During Year 1, the first year of operations, total construction costs for financial reporting and tax purposes are $400,000 (exclusive of the allowance for funds used during construction). 2. b The enacted tax rate is 34 percent for all future years. 3. c Allowance for funds used during construction (consisting entirely of the equity component) is $26,000. The asset for probable future revenue to recover the related income taxes is calculated as follows: - 34 percent of ($26,000 + A) = A (where A equals the asset for probable future revenue) 4. d A = $13,394. ##### [740-980-55-10](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:bf5d84088e3791c32f6d2d3748035d744b59a8031ed16e6d6c08005dc73f1b29 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the end of Year 1, the related accounts are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-DC8F5CA7-D95D-4EC3-B00D-945AEDB8CEA9-low.gif) Construction in progress " $426,000 " Probable future revenue " $13,394 " "Deferred tax liability \[34 percent of ($26,000 + $13,394)\]" " $13,394 " ##### [740-980-55-11](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:acacbf09bff1e6f8c4db068d7ad5fd04e2edb7c415d8a931c76257c01db72ddd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, if the allowance for funds used during construction had consisted entirely of a net-of-tax debt component in the amount of $26,000, the related accounts and their balances at the end of Year 1 would be construction in progress in the amount of $439,394 and a deferred tax liability in the amount of $13,394. ##### [740-980-55-12](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:8985785fed9c0552527cda0c34ebb1c331ebefe22e04c3de856dc73be54c250c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates adjustment of a deferred tax liability for an enacted change in tax rates. In this Case, a change in the tax rate from 34 percent to 30 percent is enacted on the first day of Year 2. As of the first day of Year 2, the related accounts are adjusted so that the balances are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-0C953503-9279-441E-A4F5-6F6368D362BB-low.gif) Construction in progress " $426,000 " Probable future revenue " $11,143 " "Deferred tax liability \[30 percent of ($26,000 + $11,143)\]" " $11,143 " ##### [740-980-55-13](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:a4f6ab039f4920f6ca86e47c7c083f1e418889c9c319d102aecc24845d709469 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates adjustment of a deferred tax liability for an enacted change in tax rates when that deferred tax liability represents amounts already collected from customers for the future payment of income taxes discussed in paragraphs [980-740-25-1 through 25-2](https://asc.understandingaccounting.org/asc/740/980/#740-980-25-1) . In that case, there would be no asset for probable future revenue. This Example has the following assumptions: 1. a Amounts at the end of Year 1, the current year, are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-C9D03D21-2070-480F-84FA-B3A198446E36-low.gif) Construction in progress for financial reporting " $400,000 " Tax basis of construction in progress " $300,000 " "Deferred tax liability (34 percent of $100,000)" " $34,000 " 2. b A change in the tax rate from 34 percent to 30 percent is enacted on the first day of Year 2. As a result of the reduction in tax rates, it is probable that $4,000 of the $34,000 (previously collected from customers for the future payment of income taxes) will be refunded to customers, together with the tax benefit of that refund, through a future rate reduction. The liability for the future rate reduction to refund a portion of the deferred taxes previously collected from customers is calculated as follows: - $4,000 + (30 percent of R) = R (where R equals the probable future reduction in revenue) 3. c R = $5,714. ##### [740-980-55-14](https://asc.understandingaccounting.org/asc/740/980/#740-980-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:21:51.112Z to 2026-09-10T01:21:51.112Z Record version: sha256:626c79b3360c5f3f0345a1c95d3e1ad955eb3a692fdbe6ab615c66bc333538f1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As of the first day of Year 2, the related accounts are adjusted so that the balances are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-ECF772A1-D6A2-4E27-AF7E-749E97892491-low.gif) Construction in progress " $400,000 " Probable reduction in future revenue " $5,714 " "Deferred tax liability \[30 percent of ($100,000 — $5,714)\]" " $28,286 "