At the end of its first year of operations on December 31, 2014, the Brandon Company reported taxable income of $100,000 and had a pretax financial loss of $60,000. Differences between taxable income and pretax financial income included interest revenue received from municipal obligations of $20,000 and warranty expense accruals of $180,000. Warranty expenses of $90,000 are expected to be paid in 2015 and $110,000 in 2016. The enacted income tax rates for 2014, 2015, and 2016 are 30%, 35%, and 40%, respectively. The journal entry to record income tax expense on December 31, 2014, would be

Question

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The correct answer is A because the deferred tax asset is calculated as the difference between the tax rate and the effective tax rate multiplied by the temporary difference. The temporary difference is the difference between the book and tax basis of the warranty expense. The effective tax rate is the average tax rate over the period that the temporary difference will reverse. In this case, the effective tax rate is 35%. The deferred tax asset is calculated as follows:Deferred tax asset = (40% - 35%) x $180,000 = $75,500The income tax expense is calculated as the tax rate multiplied by the taxable income. In this case, the income tax expense is calculated as follows:Income tax expense = 30% x $100,000 = $30,000The income tax benefit from the operating loss carryforward is calculated as the tax rate multiplied by the operating loss. In this case, the operating loss is $60,000. The income tax benefit from the operating loss carryforward is calculated as follows:Income tax benefit from operating loss carryforward = 30% x $60,000 = $45,500

At the End of Its First Year of Operations on December