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Exeter Corp. 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 paid. During its first year of operations, Exeter reports pretax accounting income of $100,000. Its income statement includes a $50,000 warranty expense that is deducted for tax purposes when paid in Year 2 in the amount of $30,000 and Year 3 in the amount of $20,000. Exeter is subject to a tax rate of 40%. Prepare the appropriate journal entry to record the company’s income tax expense for Year 1. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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TomShelby

Answer:

Income tax expense    40,000 debit

tax deferred                  20,000 credit

income tax payable               60,000 credit

Explanation:

accounting income  100,000

the warranty expense is not reocgnize for the state at year 1.

so the taxable income will be 150,000 (100,000 + 50,000 warranty expense)

as this will be reversed, have a temporal difference. this is a tax income deferred:

income tax expense:  100,000 x 40% = 40,000

we apply the rate: 150,000 x 40% = 60,000 income tax payable

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