Question
At the end of its first year of operations on December 31, 2016, the GAC Company reported taxable income of $30,000 and a pretax financial
At the end of its first year of operations on December 31, 2016, the GAC Company reported
taxable income of $30,000 and a pretax financial loss of $40,000. Differences between taxable
income and pretax financial income included estimated bad debt expense for which accounts were
expected to be written off in 2017, $20,000, and warranty costs expensed for accounting purposes
in excess of cash paid for warranty claims, $50,000. The warranty costs are expected to be
paid in 2017. The enacted tax rate for 2016 and 2017 is 30%.
Required:
a. Prepare the income tax journal entry for the GAC Company on December 31, 2016, assuming that it is more likely than not that the deferred tax asset will be realized.
b. Prepare the income tax journal entry for the GAC Company on December 31, 2016, assuming that it is more likely than not that 40% of the deferred tax asset from the warranty costs will not be realized.
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