Use the following information to answer questions 1 and 2, A firm estimates the

Question

Use the following information to answer questions 1 and 2, A firm estimates the warranty expenses to be 50% of revenues each year. The actual expenditure of $3,000 to meet warranty claims is not made until the third year. According to tax rules, such expenses cannot be recognized until they are actually paid. The current tax rate is 30%. Tax Reporting Warranty Expense Year 1 Year 2 Year 3 3,000 0 0 Financial Reporting Warranty Expense Year 1 1,000 Year 2 1,000 Year 3 1,000 1. Using the information above, this is a A) B) C) D) balance sheet liability that will create a deferred tax asset balance sheet liability that will create a deferred tax liability balance sheet asset that will create a deferred tax asset balance sheet asset that will create a deferred tax liability Using the info above, the carrying value minus the tax base at the end of year 1 will be: A) 2,000 B) -1,000 2. C) +1,000 D) +2,000

Explanation / Answer

1. D : warranty is an asset in which a company invests. Hence, its a asset on the balance sheet.

2. C

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