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Teri Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 20x0.

Book Basis Tax Basis

Equipment (net) $400,000 $340,000
Estimated warranty liability $200,000 $ -0-

It is estimated that the warranty liability will be settled in 20x1. The difference in equipment (net) will result in taxable amounts of $20,000 in 20x1, $30,000 in 20x2, and $10,000 in 20x3. The company has taxable income of $520,000 in 20x0. As of the beginning of 20x0, its enacted tax rate is 34% for 20x0-20x2, and 30% for 20x3. Teri expects to report taxable income through 20x3.

a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 20x0.

b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 20x0 (long-term or current?).

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M940413

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