Problem
Sweldon Company, at the end of 2012, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated expenses deductible for taxes when paid 1,200,000 Extra depreciation (1,350,000) Taxable income $ 600,000 Estimated warranty expense of $800,000 will be deductible in 2013, $300,000 in 2014, and $100,000 in 2015. The use of the depreciable assets will result in taxable amounts of $450,000 in each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012, assuming an income tax rate of 40% for all years.
(c) Describe a deferred tax asset and its recognition in the financial statements.