Question

In Year 1, Lobo Corp. reported for financial-statement purposes the following revenue and expenses that were not included in taxable income:

Premiums on officers' life insurance under which the corporation is the beneficiary		$5,000
Interest revenue on qualified-state or municipal bonds		$10,000
Estimated future warranty costs to be paid in Year 2 and Year 3		$60,000

Lobo's enacted tax rate for the current and future years is 30%. Lobo has paid income taxes of $170,000 for the three-year period ended December 31, Year 1. There were no temporary differences in prior years.
The deferred tax benefit to be applied against current income tax expense is

$21,000

$19,500

$18,000

$22,500

Answer 1

Answer is $18,000

Estimated future warranty cost to be paid in year 2 and year 3- $60,000*30% = $18,000

Deferred tax benefit is available on temporary differences only

In the given case premium on office’s life insurance under which corporation is the beneficiary and Interest revenue on qualified –state or municipal bonds results in permanent difference. The temporary difference is only caused by estimated future warranty cost to be paid in Year 2 and Year 3.