Lofthouse Machinery Co. includes a 2-year warranty on its machinery sales. At the end of 2011, an

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Lofthouse Machinery Co. includes a 2-year warranty on its machinery sales. At the end of 2011, an analysis of the warranty records reveals an accumulated temporary difference of $120,000 for warranty expenses; book expenses related to warranties have exceeded tax deductions allowed. The enacted income tax rate for 2011 and future years is 40%. Management concludes that it is more likely than not that Lofthouse will have future income to realize the future tax benefit from this temporary difference. They also conclude that 20% of the warranty liability is current and 80% is noncurrent.

1. How would the deferred tax information be reported on the Lofthouse balance sheet at December 31, 2011?

2. If management assumed that only 70% of the tax benefit from the temporary difference could be realized, how would the deferred tax information be reported on the balance sheet at December 31, 2011? (Recall that the valuation allowance is allocated proportionately between the current and noncurrent portions of the deferred tax asset.)


Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Intermediate Accounting

ISBN: 978-0324592375

17th Edition

Authors: James D. Stice, Earl K. Stice, Fred Skousen

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