This is an accounting problem from a corporate taxation class.

Tax Drill - Deferred Taxes

Ovate, Inc., earns $140,000 in book income before tax and is subject to a 35% marginal Federal income tax rate. Ovate's records a single temporary difference. Warranty expenses deducted for book purposes are $8,000 of which only $2,000 are deductible for tax purposes.

As a result, Ovate has a deferred tax (#1)_____________[asset/liability] of (#2)$___________ .

#1.

#2.