Pocus, Inc., reports warranty expense when related products are sold. For tax pu

Question

Pocus, Inc., reports warranty expense when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $200,000 and taxable income of $20,000,000. At the end of the previous year, Pocus reported a deferred tax asset of $80,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 30% each year.

Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year. Show well-labeled supporting computations.

Explanation / Answer

Income tax expense........................6,020,000

                 Deferred tax asset............................    20,000 (existing DTA of 80000-required DTA of 30% of 200,000)

                 Income tax payable..........................6,000,000 (30% of 20,000,000)

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