Question

Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016. Book Basis Tax Basis Equipment (net) \(400,000 \)340,000 Estimated warranty liability \(200,000 \) –0– It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of \(20,000 in 2017, \)30,000 in 2018, and \(10,000 in 2019. The company has taxable income of \)520,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016–2018, and 30% for 2019. Hatcher expects to report taxable income through 2019.Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.

Short answer

Estimated warranty liability is a term used in an organization that depicts the firm's obligation to pay the money towards its warranty assets (like repair costs) for which the services have been rendered.

Step-by-step solution

Working notes

Future taxable amounts	2017	2018	2019	Total
Depreciation	$20,000	$30,000	$10,000	$60,000
Warranty cost	($200,000)			($200,000)
Multiply: Tax rate	34%	34%	30%
Deferred tax liability	$6,800	$10,200	$3,000	$20,000
Deferred tax asset	($68,000)			($68,000)

(a) Journal entry

Date	Particulars	Debit	Credit
2016	Income tax expense	$128,800
	Deferred tax asset	$68,000
	Income tax payable $\left(\$520,000\times 34\%\right)$		$176,800
	Deferred tax liability		$20,000
	(To record the deferred tax asset/liability)

(b) Financial statement

Balance Sheet
Liabilities	Amount
Long-term liabilities
Deferred tax liability	$20,000
Assets	Amount
Deferred tax asset	$68,000