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Chapter 19: Question 5BE (page 1093)

At December 31, 2017, 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 40%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2017.

Short Answer

Expert verified

Deferred tax assetis a term used which helps an organization indecreasing the total amount of income tax payableat the end of thefinancial year. It is reported under thebalance sheet.

Step by step solution

01

Given the amounts as

Particulars

Amount

Warranty liability

$105,000

Tax basis of warranty liability

$0

Effective tax rate

40%

02

Computation of deferred tax asset on December 31, 2017

Deferredtaxasset=(Warrantyliability+Taxbasisofwarrantyliability)脳Taxrate=($105,000+$0)脳40%=$105,000脳40%=$42,000

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Most popular questions from this chapter

Oxford Corporation began operations in 2017 and reported pretax financial income of \(225,000 for the year. Oxford鈥檚 tax depreciation exceeded its book depreciation by \)40,000. Oxford鈥檚 tax rate for 2017 and years thereafter is 30%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?

Lincoln Company has the following four deferred tax items at December 31, 2017. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Temporary difference

Deferred tax asset

Deferred tax liability

Rent collected in advance: recognized when a performance obligation is satisfied for accounting purposes and when received for tax purposes.

\(652,000

Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes.

\)330,000

Recognition of income on installment sales at the time of sale for accounting purposes and during period of collection for tax purposes.

\(64,000

Warranty liabilities: recognized for accounting purposes at time of sale for tax purposes at time paid.

\)37,000

On Lincoln鈥檚 December 31, 2017, statement of financial position, it will report:

  1. \(394,000 non-current deferred tax liability and \)689,000 non-current deferred tax asset.
  2. \(330,000 non-current liability and \)625,000 current deferred tax asset.
  3. \(295,000 non-current deferred tax asset.
  4. \)295,000 current tax receivable.

Wise Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is \(100,000. 2. The tax rate enacted for 2018 and future years is 40%. 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to \)7,000. Warranty deductions per the tax return amount to \(2,000. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to \)92,000. Gross profit on construction contracts for tax purposes amounts to \(67,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to \)60,000. Depreciation of these assets amounts to \(80,000 for the tax return. (d) A \)3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,500. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Instructions (a) Compute taxable income for 2018. (b) Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (d) Draft the income tax expense section of the income statement, beginning with 鈥淚ncome before income taxes.鈥�

At December 31, 2017, Percheron Inc. had a deferred tax asset of \(30,000. At December 31, 2018, the deferred tax asset is \)59,000. The corporation鈥檚 2018 current tax expense is $61,000. What amount should Percheron report as total 2018 income tax expense?

Youngman Corporation has temporary differences at December 31, 2017, that result in the following deferred taxes. Deferred tax liability related to depreciation difference $38,000 Deferred tax asset related to warranty liability 62,000 Deferred tax liability related to revenue recognition 96,000 Deferred tax asset related to litigation accruals 27,000 Indicate how these balances would be presented in Youngman鈥檚 December 31, 2017, balance sheet.
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