DTL and DTA MC question ]=

Accrued warranty exp = 300 Actual expenditures for repair under warranty = 200 tax = 35%, whats the deferred tax recorded with respect to the new product warranty? the answer is 35 deferred tax asset. Can someone explain this to me? My understanding is that the IS expense is 300 and the tax base is 200. Doesn’t this mean its a 35 DTL?

If my memory serves me right, for tax purposes, warranty is expensed when it occurs. For financial reporting, the expense is taken out right away… therefore, 200 is expensed for accounting, your tax payable is higher 300 is expensed in financial statements. your tax expense is lower results in a DTA

This is a tricky concept, but pretty easy once you write it out and reason through it. GAAP requires that the company estimate warranty expense and charge it to earnings in over time, regardless of whether or not there is a warranty claim in the year and cash expense. This is because warranty expense can fluctuate and the requirement to estimate it smooths results over time. On the tax book, the warranty expense is only tax deductible when an actually cash warranty expense is incurred. In this case, the company estimated $300k of warranty during the year and charged it all to earnings. However, on the tax book, they were only able to write off $200k of it, resulting in higher net income before taxes on the tax return. So they paid more taxes on the tax return than they would of if they used the income statement. The amount of “overpaid” taxes relative to the income statement was $100k x 35%, which goes on the books as a DTA.

Oh my bad. Just overwhelmed by the wealth of material, I totally just compared the amounts of expense, not that tax payables!