Question

Lance Lawn Services reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when the warranty work is completed. At December 31, 2021, Lance has a warranty liability of $2 million and taxable income of $90 million. At December 31, 2020, Lance reported a deferred tax asset of $453,000 related to this difference in reporting warranties, its only temporary difference. The enacted tax rate is 25% each year.

Required: Prepare the appropriate journal entry to record Lance’s income tax provision for 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Answer 1

Answer:

Journal Entry

No.	Date	General Journal	Debit	Credit
1	12-31-2021	Income tax expense	22,453,000
		Deferred tax asset	47,000
		Income tax payable		22,500,000

Calculation:

Warranty liability in December 31 2021 is $2,000,000
Hence, the balance for the deferred tax asset will be: (.25 x 2,000,000) = $500,000.
Before the adjustment the balance for the deferred tax asset is $453,000
Thus the tax asset is increased (debited): (500,000 - 453,000) = $47,000.

Taxable Income is 90,000,000.
So Tax payable will be 90,000,000*25% = 22,500,000