D is corrent. The requirement is stated as "the deferred tax benefit to be applied against income tax expense." It means the deferred component of income tax expense. The premiums on officers’ life insurance ($5,000) and the municipal interest revenue ($10,000) are both permanent differences, so they do not affect deferred taxes. The estimated future warranty cost ($60,000) is a temporary difference which results in future deductible amounts in year 4 and year 5. The deferred tax benefit is $18,000 (30% x $60,000). A reduction of the deferred tax benefit and establishment of a related allowance account are not needed in this case because the evidence about past and future profitability does not indicate that it is more likely than not that part or all of the asset may not be realized.
A is incorrect. The requirement is stated as "the deferred tax benefit to be applied against income tax expense." It means the deferred component of income tax expense. The premiums on officers’ life insurance ($5,000) and the municipal interest revenue ($10,000) are both permanent differences, so they do not affect deferred taxes. The estimated future warranty cost ($60,000) is a temporary difference which results in future deductible amounts in year 4 and year 5. The deferred tax benefit is $18,000 (30% x $60,000). A reduction of the deferred tax benefit and establishment of a related allowance account are not needed in this case because the evidence about past and future profitability does not indicate that it is more likely than not that part or all of the asset may not be realized.
B is incorrect. The requirement is stated as "the deferred tax benefit to be applied against income tax expense." It means the deferred component of income tax expense. The premiums on officers’ life insurance ($5,000) and the municipal interest revenue ($10,000) are both permanent differences, so they do not affect deferred taxes. The estimated future warranty cost ($60,000) is a temporary difference which results in future deductible amounts in year 4 and year 5. The deferred tax benefit is $18,000 (30% x $60,000). A reduction of the deferred tax benefit and establishment of a related allowance account are not needed in this case because the evidence about past and future profitability does not indicate that it is more likely than not that part or all of the asset may not be realized.
c is incorrect. The requirement is stated as "the deferred tax benefit to be applied against income tax expense." It means the deferred component of income tax expense. The premiums on officers’ life insurance ($5,000) and the municipal interest revenue ($10,000) are both permanent differences, so they do not affect deferred taxes. The estimated future warranty cost ($60,000) is a temporary difference which results in future deductible amounts in year 4 and year 5. The deferred tax benefit is $18,000 (30% x $60,000). A reduction of the deferred tax benefit and establishment of a related allowance account are not needed in this case because the evidence about past and future profitability does not indicate that it is more likely than not that part or all of the asset may not be realized.
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