Multiple Choice Question 77 At the beginning of 2018; Crane, Inc. had a deferred
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Question
Multiple Choice Question 77
At the beginning of 2018; Crane, Inc. had a deferred tax asset of $14000 and a deferred tax liability of $24000. Pre-tax accounting income for 2018 was $1380000 and the enacted tax rate is 40%. The following items are included in Crane’s pre-tax income:
Which of the following is required to adjust Crane, Inc.’s deferred tax asset to its correct balance at December 31, 2018?
Explanation / Answer
Calculation of Taxable income of Crane Inc. for 2018 (Amount in $)
There is only one temporary taxable difference for Deferred tax Assets that is Accrued warranty costs, estimated to be paid in 2019 (it is disallowed in 2018 but will be allowed as deduction in 2019 hence Deferred tax asset need to be recognized for this amount of $248,000).
Required closing balance of Deferred Tax Asset = Accrued Warranty costs*Tax rate
= $248,000*40% = $99,200
Opening Balance of Deferred Tax Asset = $14,000
Additional amount required to be debited to adjust Crane, Inc.’s deferred tax asset
= Required closing balance of Deferred Tax Asset - Opening Balance of Deferred Tax Asset
= $99,200 - $14,000 = $85,200
Hence a debit of $85,200 is reqired to adjust Crane, Inc.’s deferred tax asset to its correct balance at December 31, 2018.
Therefore the correct option is C) A debit of $85200.
Pre tax accounting income 1,380,000 Less: Interest income from municipal bonds (108,000) Add: Accrued warranty costs, estimated to be paid in 2019 248,000 Less: Operating loss carryforward (178,000) Less: Installment sales profit, will be taxed in 2019 (118,000) Less: Prepaid rent expense, will be used in 2019 (54,000) Taxable Income 1,170,000Related Questions
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