Question
Blue Canoes recorded book income of $100,000 in 2018. The company did not have any permanent differences; the companys only temporary difference relates to a
Blue Canoes recorded book income of $100,000 in 2018. The company did not have any permanent differences; the companys only temporary difference relates to a $30,000 warranty expense that it recorded on the income statement, but cannot deduct for tax purposes until actual repairs are made. Blue Canoes anticipates satisfying the warranty liability equally over the next three years. The current enacted tax rate is 40%. The enacted tax rates for 2019, 2020, and 2021 are 35%, 30%, and 30%, respectively.
How is the journal entry below correct?
I understand where the Deferred Tax Asset of $9,500 comes from but I don't understand how Income Taxes Payable is $52,000 [($100,000+$30,000)*0.40].
I thought to compute Income Tax Expense you would do $100,000-$30,000=$70,000 --> taxable income --> $70,000*0.4= $28,000
And for Income Taxes Payable it would be $100,000*0.4= $40,000.
Why is the warranty liability of $30,000 added back to the income instead?
(DR) Income Tax Expense 42,500
(DR) Deferred Tax Asset 9,500
(CR) Income Taxes Payable 52,000
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