Warranty costs in the amount of $500,000 were recorded on the 2018 income statement. however, the warranty tax deduction is not allowed until payment occurs in future years.

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Warranty costs amounting $500,000 were recorded in 2018 Income statement. However, the warranty tax deduction is not allowed until payment occurs in future years. Disscuss accouting implication

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Explanation:

As per tax laws warranty provision is not allowed as deductible expense only warranty cost incured/paid during the year is allowed deduction when computing taxable income.

So the company shall recoginze defferd tax asset for this expense in current year. Following entries will be made by the company for financial accounting purpose.

Deffered Tax Asset Debit    $125000

Deffered Tax Income            $125000

(Assuming applicable tax rates is 25%)

The next year when the warranty claim will be incured/paid the company will reverse the above entry and can claim tax deduction against this waranty cost paid but not on provision basis.

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