Question

13) on December 31, Year 3, Douglass Company reported a $6,000 warranty expense in its income statement. The expense was based on actual warranty costs of $1,200 in Year 3 and expected warrant costs of $1,400 in Year 4, $1,600 in Year 5, and $1,800 in Year 6. At December 31, Year 3, deferred taxes should be based on a

$4,800 taxable temporary difference

$4,800 deductible temporary difference

$6,000 deductible temporary difference

$6.000 taxable temporary difference

Answer 1

Answer is:

$4,800 deductible temporary difference

Warranty expense of $6000 has been reported in Year 3 in income statement and net income reduced by $6000 but in actual, $1200 has been deducted in Year 3 and from income tax point of view, warranty expense which has been actually incurred in the year will be allowed as deduction in that particular year. So, only $1200 will be allowed as deduction and $4800 will be deducted in future taxable income when it is actually incurred. So, It is deferred taxes based on a $4,800 deductible temporary difference.