Truck Co., organized January 7th, 20X5, has pretax accounting income of $720,000

Question

Truck Co., organized January 7th, 20X5, has pretax accounting income of $720,000 and taxable income of $950,000 for the year ended December 31, 20X5. The only temporary difference is accrued product warranty costs that are expected to be paid as follows: 20X6 $150,000 20X7 $70,000 20X8 $50,000 20X9 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 20X5, 25% for 20X6 through 20X9. How should the deferred income tax associated with accrued product warranty be recorded in Truck’s December 31, 20X5 balance sheet?

Explanation / Answer

The deferred income tax associated with accrued product warranty be recorded in Truck’s December 31, 20X5 balance sheet =

20X6 : $150,000 * 0.25 = 37500

20X7: $70,000 * 0.25 = 17500

20X8: $50,000 * 0.25 = 12500

20X9 : 120,000 *0.25 = 30000

Total deferred tax = 97500

journal =

Tax expense (plug) ................................187500
Deferred tax asset (computed above).... 97500
Taxes payable (30% x $950000)......................... 285000

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