At the beginning of 2018; Crane, Inc. had a deferred tax asset of $14000 and a deferred tax liability of $24000. Pre-tax accounting income for 2018 was $1380000 and the enacted tax rate is 40%. The following items are included in Crane’s pre-tax income: Interest income from municipal bonds $108000 Accrued warranty costs, estimated to be paid in 2019 $248000 Operating loss carryforward $178000 Installment sales profit, will be taxed in 2019 $118000 Prepaid rent expense, will be used in 2019 $54000 Which of the following is required to adjust Crane, Inc.’s deferred tax asset to its correct balance at December 31, 2018?
A credit of $99200
A credit of $79600
A debit of $79600
A debit of $85200

A debit of $85,200.

Explanation:

Taxable income:

= Pre tax accounting income - Interest income from municipal bonds + Accrued warranty costs, estimated to be paid in 2019 - Operating loss carryforward - Installment sales profit, will be taxed in 2019 - Prepaid rent expense, will be used in 2019

= $1,380,000 - $108,000 + $248,000 - $178,000 - $118,000 - $54,000

= $1,170,000

Required closing balance of Deferred Tax Asset:

= Accrued Warranty costs × Tax rate

= $248,000 × 40%

= $99,200

Additional amount required to be debited to adjust Crane, Inc.’s deferred tax asset:

= Required closing balance of Deferred Tax Asset - Opening Balance of Deferred Tax Asset (given)

= $99,200 - $14,000

= $85,200

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