Pocus, Inc., reports warranty expense when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $180,000 and taxable income of $16,000,000. At the end of the previous year, Pocus reported a deferred tax asset of $76,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 25% each year. Required: Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year.

Answer and Explanation:

The appropriate journal entry to record the income tax provision is shown below;

Income tax expense $4,031,000

         To Deferred tax asset $31,000 ($76,000 - ($180,000 × $0.25)

        To Income tax payable ($16,000,000 × 0.25) $4,000,000

(Being income tax expense is recorded)

Here the income tax expense is debited as it increased the expense, credited the deferred tax asset as it decreased the asset and credited the income tax payable as it increased the liabilities

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