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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)×Taxrate=($105,000+$0)×40%=$105,000×40%=$42,000

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Most popular questions from this chapter

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?

Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulatedoperating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to haveturned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operatingloss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerateddepreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of thedeferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accountingconsequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognitionof its deferred tax asset.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/).(Click on the IFRS tab and then register for freeeIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser torespond to the following questions. (Provide paragraph citations.)

(a)Briefl y explain to Kleckner management the importance of future taxable income as it relates to the recognition ofdeferred tax assets.

(b)What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?

(c)What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a taxplanningstrategy in evaluating its deferred tax asset?

: Describe the current convergence efforts of the FASB and IASB in accounting for taxes.

Part A: This year, Gumowski Company has each of the following items in its income statement.

1. Gross profits on installment sales.

2. Revenues on long-term construction contracts.

3. Estimated costs of product warranty contracts.

4. Premiums on officers’ life insurance policies with Gumowski as beneficiary.

Instructions

(b) Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition.

How are deferred tax assets and deferred tax liabilities reported on the statement of financial position under IFRS?
See all solutions

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