Question

Truck Co., organized January 7th, year 1, has pretax accounting income of $720,000 and taxable income of $950,000 for the year ended December 31, year 1. The only temporary difference is accrued product warranty costs that are expected to be paid as follows: year 2 $ 150,000 year 3 $ 70,000 year 4 $ 50,000 year 5 $ 120,000 Truck has never had any operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The enacted income tax rates are 30% for year 1 and 25% for year 2 through year 5. How should the deferred income tax associated with accrued product warranty be recorded in Truck’s December 31, year 1 balance sheet?

Answer 1

$97,500 Assets will be recorded

Step-by-step explanation:

Calculation of deferred tax

Year 2 = $150,000 * 0.25 = 37,500

Year 3= $70,000 * 0.25 = 17,500

Year 4 = $50,000 * 0.25 = 12,500

Year 5 = $120,000 * 0.25 = 30,000

Total deferred tax $97,500

Taxes payable = $285,000 (30% * 95,000

Tax expenses = $187,500

Deferred tax asset = $97,500