At the beginning of 2021; Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2021 was $1,500,000 and the enacted tax rate is 20%. The following items are included in Elephant’s pretax income: Interest income from municipal bonds $120,000 Accrued warranty costs, estimated to be paid in 2022 $260,000 Operating loss carryforward $190,000 Installment sales profit, will be taxed in 2022 $130,000 Prepaid rent expense, will be used in 2022 $60,000 Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct balance at December 31, 2021?

Please note that when warranty costs are actually paid,then it will be given benefit of tax,therefore it is deferred tax asset. Operating loss will be adjusted when company is likely to have profits in future therefore it is deferred tax asset. As the rent is prepaid now but expense will be recorded in next year which will result in reduced profits then it is also deferred tax asset.

Whereas the income from municipal bonds,installment sales are deferred liabilities therefore not accounted for in deferred tax asset.

andromache andromache · Answer 2 · 2022-04-07T12:55:41+02:00

The deferred tax asset to its correct balance at December 31, 2021 should be $122,000.

Calculation of the deferred tax asset;

Since

Deferred tax asset-opening $20,000

Accrued Warranty costs ($260,000*20%) $52,000

operating loss ($190,000*20%) $38,000

Prepaid rent ($60,000*20% ) $12,000

Total Deferred Tax Asset $122,000

Hence, The deferred tax asset to its correct balance at December 31, 2021 should be $122,000.

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