Question

Marsh Corp. reported a deferred tax asset of $34,000 in 20×2, caused by a warranty liability of $100,000. The tax rate was 34%. In 20×3, accounting earnings were $240,000, warranty claims paid were $78,000, and warranty expense was $39,000. The tax rate is 20% Required: Calculate tax payable.

Answer 1

To calculate the tax payable for Marsh Corp., deduct warranty expenses from the accounting earnings, adjust for actual claims paid, then apply the current tax rate; resulting in a tax payable of $40,200.

Step-by-step explanation:

Calculation of Tax Payable

First, we need to calculate the taxable income for Marsh Corp. The initial accounting earnings for 20×3 are $240,000. Since the warranty expense of $39,000 is deductible and the actual warranty claims of $78,000 were paid, the taxable income is adjusted by the difference between these two amounts. The company would add back the $39,000 expense and subtract the $78,000 actual claims paid, resulting in a $201,000 taxable income ($240,000 - $39,000 + $78,000). With a tax rate of 20%, the tax payable would be $40,200 ($201,000 × 20%).