Question

At December 31, 2020, Suffolk Corporation had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 20%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2020.

Answer 1

Deferred tax asset = $21000

Step-by-step explanation:

Given the warranty liability = $105000

Effective tax rate = 20%

The deferred tax asset can be calculated by calculating the effective tax from the warranty liability. Therefore, just multiply the effective tax rate to the warranty liability.

Deferred tax asset = Effective tax rate x Warranty liability

Deferred tax asset = 20% x $105000

Deferred tax asset = $21000