Question

Button Company has the following two temporary differences between its income tax expense and income taxes payable2017 2018 2019 Pretax financial income \(840,000 \)910,000 \(945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in financial income 20,000 10,000 8,000 Taxable income \)830,000 \(880,000 \)943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019. (b) Indicate how deferred taxes will be reported on the 2019 balance sheet. Button’s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2019, beginning with the line “Pretax financial income.”

Short answer

Warranty expense is the type of expenditure made by an organization on the assets in their warranty period. It is treated under the profit and loss statement of the firm.

Step-by-step solution

(a) Journal entry for the years 2017, 2018, and 2019

Date	Particulars	Debit	Credit
2017	Income tax expense	$336,000
	Deferred tax asset$\left(\$20,000\times 40\%\right)$	$8,000
	Deferred tax liability $\left(\$30,000\times 40\%\right)$		$12,000
	Income tax payable $\left(\$830,000\times 40\%\right)$		$332,000
	(To record the income tax expense)
2018	Income tax expense	$364,000
	Deferred tax asset$\left(\$10,000\times 40\%\right)$	$4,000
	Deferred tax liability $\left(\$40,000\times 40\%\right)$		$16,000
	Income tax payable $\left(\$880,000\times 40\%\right)$		$352,000
	(To record the income tax expense)
2019	Income tax expense	$378,000
	Deferred tax asset$\left(\$8,000\times 40\%\right)$	$3,200
	Deferred tax liability $\left(\$10,000\times 40\%\right)$		$4,000
	Income tax payable $\left(\$943,000\times 40\%\right)$		$377,200
	(To record the income tax expense)

(b) Indication of deferred taxes under the balance sheet for 2019.

Balance Sheet
Liabilities	Amount
Long-term liabilities
Deferred tax liability	$32,000
Asset	Amount
Current assets
Deferred tax asset	$15,200

(c) Income statement

Income Statement
Particulars		Amount
Pretax financial income		$945,000
Less: Income tax expense
Current tax expense	$377,200
Deferred tax expense	$800	$378,000
Net Income		$567,000