Question

At December 31, 2017, Suffolk Corporation had an estimated warranty liability of \(105,000 for accounting purposes and \)0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2017.

Short answer

Deferred tax assetis a term used which helps an organization indecreasing the total amount of income tax payableat the end of thefinancial year. It is reported under thebalance sheet.

Step-by-step solution

Given the amounts as

Particulars	Amount
Warranty liability	$105,000
Tax basis of warranty liability	$0
Effective tax rate	40%

Computation of deferred tax asset on December 31, 2017

$\begin{array}{rcl}\mathrm{Deferred}\mathrm{tax}\mathrm{asset}& =& (\mathrm{Warranty}\mathrm{liability}+\mathrm{Tax}\mathrm{basisof}\mathrm{warranty}\mathrm{liability})\times \mathrm{Tax}\mathrm{rate}\\ & =& (\$105,000+\$0)\times 40\%\\ & =& \$105,000\times 40\%\\ & =& \$42,000\end{array}$