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

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Answer:

Deferred tax asset = $2100

Explanation:

Deferred tax asset will be created since deduction allowable for tax purposes in current year is in less amount, the other $6000 deduction for warranty expenses will be allowable in future years. Hence, it has deferred tax asset of [(8000-2000)x35%] $2100.

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