Primpton Co. at the end of 2015, its first year of operations, prepared a reconc

Question

Primpton Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $ 750,000

Estimated warranty expenses deductible for taxes when paid 1,200,000

Extra depreciation (1,650,000)

Taxable income $ 300,000

Estimated warranty expense of $800,000 will be deductible in 2016, $300,000 in 2017, and $100,000 in 2018.

The use of the depreciable assets will result in taxable amounts of $550,000 in each of the next three years. The tax rate for all years is 40%.

Question 1: The income tax expense in 2015 is: a. $250,000 b. $300,000 c. $310,000 d. $275,000

Question 2: The deferred tax liability in 2015 is: a. $600,000 b. $660,000 c. $675,000 d. $575,000

Explanation / Answer

Income ax expense = 750000 x 0.4 = $300000

Deferred tax liability = 1650000 x 0.4 = $660000

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