Question

Some items are treated differently for accounting purposes than they are for tax purposes. For the following item: Estimated future warranty costs, indicate whether it is considered a permanent difference or a temporary difference. For a temporary difference, indicate whether it will create a deferred tax asset or a deferred tax liability.

 

Answer 1

It results in temporary differences as an organization is required to report the accrued warranty liability of the product in its financial statements.

After the process of proper analysis and observation, the amount for the accrued liability is recorded in accordance with the mentioned laws of tax.

But they are not recorded in the tax return until they have actually occurred and this is the reason behind the difference between the income as per financial statements and the tax return.

In accordance with the rules and regulations of tax authorities, it is classified as a deferred tax asset which is reported in the position statement under the heading of non-current assets of an organization.

The expense which company wants to incur or has already incurred for the purpose of repairing or replacing the goods that it has sold to the purchaser is considered as an estimated future warranty cost.