# defer tax problem

Can anyone help me to resolve the problem On dec 31 2001 xxx sold inventory on 4 year installment sales basis for total 10,000,000, with 25% paid on the date of the sale and balance due in 3 equal installments. xxx cost in the inventory is 6,000,000. It has 2 years warranty at 600,000. xxx recogizes revenue at the point of sale and expense at the time of accural. For tax purpose, however, xxx recognizes income when cash is received and is not permitted to recognize warranty expense until actual warranty expense is incurred. xxx tax rate is 30%. for the year end dec 31,2001, xxx should show, based on the above transaction, an increase in its tax-deferred ans: lib:900,000, increase in tax deferred as 180,000 from the answer, income tax expense is (10,000,000 - 6,000,000 ) * 30% = 1,200,000 tax payable is 1,200,000 * 0.25 = 300,000 <== why ??? the difference is 1,200,000 - 300,000 = 900,000 warranty result 600,000 * 0.3 = 180,000

To your question, because for tax purposes revenue is recognized at cash receipt. xxx receives cash in 4 installments, of 25% each. Since only 25% of the cash is received at 2001 year end, only 25% of the tax expense is payable. The difference between the income tax expense and the taxes payable is a tax liability. Warranty expense is not recognized until actually incurred, so for tax purposes nothing is deducted under warranty expense is such expense did not actually occur. Hence, it creates an increase in deferred taxes (asset) of 30%*warranty expense = 180,000. When actually incurred, these warranty expenses would reduce taxes payable.

Many Many thanks map1 explaination, but i donâ€™t know why it use taxable income 1,200,000 tax payable is 1,200,000 * 0.25 = 300,000 <== why ??? Could you please further elaborate

xxx sold inventory on 4 year installment sales basis for total 10,000,000 xxx cost in the inventory is 6,000,000. xxx tax rate is 30%. so EBT = 10000 - 6000 = 4000 tax payable = 4000 * .3 = 1200

thanks for map1 and cpk123 help