Question

Exeter Corp. reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when paid. During its first year of operations, Exeter reports pretax accounting income of $100,000. Its income statement includes a $50,000 warranty expense that is deducted for tax purposes when paid in Year 2 in the amount of $30,000 and Year 3 in the amount of $20,000. Exeter is subject to a tax rate of 40%. Prepare the appropriate journal entry to record the company’s income tax expense for Year 1. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Income statement : Book Income	100,000
Add : Temporary difference (product warranty)	50,000
Tax : Taxable income	150,000

Income tax expense (current) = Taxable income * Current tax rate of 40% = 150,000*40% = 60,000

Deferred tax asset = Positive temporary difference * Future tax rate of 40% = 50,000*40% = 20,000

Income tax expense = Income tax expense (current) + Deferred tax liability - Deferred tax asset

= 60,000 - 20,000

= 40,000

Journal entry

Income tax expense	40,000
Deferred tax asset	20,000
Income tax payable		60,000