Question

At the beginning of 2021; Columbo Company had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2021 was $1,500,000 and the enacted tax rate is 20%.

The following items are included in Columbo’s pre-tax income:

Interest income from municipal bonds                                      $120,000

Accrued warranty costs, estimated to be paid in 2022             $260,000

Operating loss carryforward                                                      $190,000

Installment sales profit, will be taxed in 2022                           $130,000

Prepaid rent expense, will be used in 2022                                $60,000

Which of the following is required to adjust Columbo’s deferred tax asset to its correct balance at December 31, 2021?

Group of answer choices

A credit of $52,000

A debit of $32,000

A debit of $28,000

A credit of $28,000

Answer 1

Following is the balancesheet as per deferred tax assets and liabilities :

Assets	Amount	Liabilities	Amount
Opening	$20,000	Opening	$30,000
Accounting income	$1,50,000	Accrued warranty costs	$2,60,000
Operating loss carryforward	$1,90,000
Prepaid rent expense	$60,000	Difference	$2,60,000
Installment sales profit	$1,30,000
Total	$5,50,000	Total	$5,50,000

Tax rate is 20%. So $2,60,000*20/100 = 52,000

So we need to credited $$52,000 to adjust Columbo’s deferred tax asset to its correct balance at December 31, 2021.