[altosal]

Company A began manufacturing operations on January 2, Year 4. In Year 4, Company A earned a pretax book income of $300,000 and had taxable income of $400,000. The difference related to accrued product warranty costs which are expected to be paid out as follows: Year 5 - $60,000; Year 6 - $30,000; Year 7 - $10,000. The enacted tax rates are 30% for Years 4 and 5 and 40% for Years 6 and 7.
1. What amount of deferred tax should be reported on Company A's December 31, Year 4, balance sheet?
2. If Company A paid no estimated taxes, what is the income payable to be reported at the end of Year 4?
3. What is the income tax expense to be reported by Company A on Year 4 income statement?

[Just Looking]

Please read the following announcement.

https://www.askmehelpdesk.com/financ...-b-u-font.html

We won't do your homework for you, but if you'd like to post your work we can check it and help you with what you don't understand.

To get you started in the right direction, you are dealing with a tax deferral situation here because for financial reporting purposes the company charges warranty expense and sets up a warranty payable based on current sales. $100,000 has been calculated as the estimated warranty expense that will occur based on sales. However, for tax purposes the warranty expenses are not deducted until actually paid.

Calculation of deferred taxes are based on when the deferral is reversing - that is, when the expenses become actual.

[altosal]

1. $30,000 deferred tax asset
2. $120,000
3. $90,000

[Just Looking]

Not quite. You are computing everything based on 30% tax rate, but a 40% tax rate applies in years 6 and 7. Assuming these tax rates have already been passed into law, you compute using the known rates.

Income tax payable is what you must physically pay, so the $120,000 (400,000 at 30%) is correct.

The deferred tax asset is based on the rates that occur when the benefit will take place: ($60,000 at 30%) plus ($30,000 at 40%) plus ($10,000 at 40%).

The tax expense is based on what you will eventually pay:
Current year of $400,000 at 30%
Less deduction of $60,000 at 30% in Year 5
Less deduction of $30,000 at 40% in Year 6
Less deduction of $10,000 at 40% in Year 7

[altosal]

Thank you for being straight-forward... textbooks are very evasive for students like myself. You are a great help and i appreciate you. Thanks again.

[Just Looking]

I understand. It can be really confusing, and for some reason textbooks make deferrals extremely confusing. We are happy to help here, especially when students show they are making an effort. Thanks, and good luck.