Question

J-Matt, Inc., had pretax accounting income of $331,000 and taxable income of $376,000 in 2021. The only difference between accounting and taxable income is estimated product warranty costs of $45,000 for sales in 2021. Warranty payments are expected to be in equal amounts over the next three years (2022–2024) and will be tax deductible at that time. Recent tax legislation will change the tax rate from the current 25% to 20% in 2023. Prepare the appropriate journal entry.

Answer 1

Estimated Product Warranty Cost = $376,000 - $331,000 = $45,000

Warranty payment in 3 equal Installment = $45,000 / 3 = $15,000

Computation of Deferred Tax Asset
	2022	2023	2024
Warranty Expense Payment	$15,000	$15,000	$15,000
*Income tax rate	25%	20%	20%
Deferred Tax Asset	$3,750	$3,000	$3,000

Income Tax Payable = taxable income * Current tax rate = $376,000 * 25% = $94,000

Deferred Tax Asset = $3,750 + $3,000 + $3,000 = $9,750

Income tax expense = $94,000 - $9,750 = $84,250

Solution:

Journal Entry
Date	Account titles	Debit	Credit
31-Dec-21	Income tax expense Dr	$84,250
	Deferred Tax Asset Dr	$9,750
	To Income Tax Payable		$94,000