Question

1> For calendar year 2018, Sol Corp reported depreciation of $500,000 in its income statement. On its 2018 income tax return, Sol reported depreciation of $900,000. Sol's income statement also included $220,000 accrued warranty expense that will be deducted for tax purposes when paid. Sol's enacted tax rates are 35% for 2018 and 2019, and 30% for 2020 and 2021. The depreciation difference and warranty expense will reverse over the next three years as follows:

Depreciation Difference Warranty Expense

2019 160,000 50,000

2020 140,000 80,000

2021 100,000 90,000

Total 400,000 220,000

These were Sol's only temporary differences. What should be the deferred portion of its provision for income taxes should be in the King's 2018 income statement?

a) What is the account name for the deferred portion of the provision for income taxes?

b) What is the amount for the deferred portion of the provision for income taxes?

Answer 1

a.) The Difference on account of excess depreciation of $400,000 in 2018 will result in Deferred tax Liabilty & accured Warranty expense of $ 220,000 will result in Deferred tax liability because it will be allowed in susbequent year when the actual expense incurred, Hence the net of $180,000 ( 400,000 - 220,000 ) will result in Deferred Tax Liability for the deferred portion of the provision for Income Taxes.

b.)	Year	Depreciation Difference	Warranty Expense	Net Difference	Tax rate	Deferred tax Liability$
	2019	160,000	50,000	110,000	35%	38,500
	2020	140,000	80,000	60,000	30%	18,000
	2021	100,000	90,000	10,000	30%	3,000
	Total	400,000	220,000	180,000		59,500

Amount for the deferred portion of the provision for income taxes is $ 59,500.