Income Taxes

Earl Co$.$ at the end of $2007,$ its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $ $750,000$

Estimated warranty expenses deductible for taxes when paid $1,200,000$

Extra depreciation $(1,350,000)$

Taxable income $ $600,000$

Estimated warranty expense of $$800,000$ will be deductible in $2008,$ $$300,000$ in $2009,$ and $$100,000$ in $2010.$ The use of the depreciable assets will result in taxable amounts of $$450,000$ in each of the next three years.

Required:

$($a$)$ Indicate whether the estimated warranty expense would result in a deferred tax liability or a deferred tax asset.

$($b$)$ Indicate whether the extra tax depreciation would result in a deferred tax liability or a deferred tax asset.

$($c$)$ Prepare a schedule of future taxable and deductible amounts and calculate the deferred tax asset and liability at the end of $2007,$ assuming an income tax rate of $30\%$ for all years.

$($d$)$ Prepare the journal entry to record income tax expense, deferred tax asset, deferred tax liability, and income taxes payable for $2007.$