Question

At December 31, 2020, Vaughn Corporation had an estimated warranty liability of $106,000 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 Vaughn should report as a deferred tax asset at December 31, 2020.

Answer 1

Deferred tax asset at December 31 2020 i $21,200

Step-by-step explanation:

Deferred tax asset =warranty costs liability*tax rate

warranty costs liability is $106,000

tax rate is 20%

deferred tax asset=$106,000*20%

=$21,200

The is the future tax implication of the warranty liability,the rationale behind this computation is that when the liability is settled in cash,the settlement would reduce ta liability by $21,200 since warranty liability is deductible when paid in cash.