The Hudson Motor Company manufactures engines for small airplanes. The company offers its customers a warranty for five years or 5,000 flying hours. In 2010, the company sold engines valued at $3,000,000 and estimated that the future warranty costs on these engines would be 5% of sales. It incurred costs of $25,000 associated with warranty work on engines during 2010 and $35,000 during 2011.
Required:
a. Calculate the deferred income tax asset or liability amount associated with the warranty in 2010. The tax rate is 35%.
b. Calculate the deferred income tax asset or liability balance that would appear on the statement of financial position at the end of 2011.
c. Where on the statement of financial position would the deferred income tax balance be reported?