Question
Explorers Auto Parts, Inc. reported pretax accounting (GAAP) income of $200,000 in 2019. Included in this amount is $100,000 of warranty expense. IRS rules say
Explorers Auto Parts, Inc. reported pretax accounting (GAAP) income of $200,000 in 2019. Included in this amount is $100,000 of warranty expense.
IRS rules say that warranty expenses cannot be used to reduce taxable income until they are paid. $0 of warranty expense was paid in 2019.
The 2019 tax rate was 25%.
Required:
[1] Prepare the journal entry necessary to record Explorers' 2019 taxes.
[2] Due to COVID-19, there is uncertainty regarding whether Explorers Auto will be able to utilize the tax asset created in 2019 (i.e., the company does not anticipate generating significant taxable income for the next several years). It estimates that it will not be able to use 20% of the deferred tax asset (DTA) recorded in [1] above. Record the entry necessary in 2020 to establish an appropriate valuation allowance.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started