During 2013, the Sanchez Co. incurred and recognized $30,000 in warranty expense

Question

During 2013, the Sanchez Co. incurred and recognized $30,000 in warranty expense on its income statement, but reported only $15,000 in warranty expense on its income tax return. The additional $15,000 will be deductible on the tax return during the next year when additional warranty claims are paid. Assuming a 40% tax rate, which of the following items would show up in the 2013 financial statements?

A. Deferred income tax asset of $15,000.

B. Deferred income tax liability of $15,000.

C. Deferred income tax asset of $6,000.   

D. Deferred income tax liability of $6,000.

Explanation / Answer

C. Deferred income tax asset of $6,000.

Deferred income tax asset = $15,000 × 40% = $6,000

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