Question

Black Co., organized on January 2, 2016, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, 2016.

The only temporary difference is accrued product warranty costs that are expected to be paid as follows:

2017 $100,000
2018 $ 50,000
2019 $ 50,000
2020 $100,000

The enacted income tax rates are 25% for 2016, 30% for 2017 through 2019, and 35% for 2020. Black believes that future years’ operations will produce profits.
In its December 31, 2016, balance sheet, what amount should Black report as deferred tax asset?

Answer 1

Black will report a deferred tax credit of $75000 in their balance sheet for 2016

Step-by-step explanation:

To determine the rate at which we will recognize the tax asset we need to use the tax rate which is applicable to the 2016 year which is 25%.

The fact that the warranty costs will be paid in 2017 and the following years has no affect on the current year's accounting income and taxable income of $800000.

We therefore will work out the deferred tax asset for 2016 on the difference between the Taxable income and the accounting profit. The difference is $300000.

We will raise a deferred tax asset of $300 000 x 25% = $75000.

Black will report a deferred tax credit of $75000 in their balance sheet.