How do I answer this?Carrot Company has been profitable in the past and expects to remain profitable in the future. Carrot sells a product for which it provides a 5-year warranty. For financial reporting purposes, Carrot estimates its future warranty costs and records a warranty expense and liability at year-end, whereas for income tax purposes the company deducts its warranty costs when paid. At the beginning of the current year, Carrot had a deferred tax asset of $500 related to the warranty liability on its balance sheet. At the end of the current year, the company estimates that its ending warranty liability is $2,000Carrot had current year taxable income of $10,000 and is subject to an enacted future tax rate of 30%.Prepare a schedule to compute Carrot's (a) ending future deductible amount, (b) ending deferred tax asset, and (c) change in deferred tax asset for the current year (deferred tax benefit). For those boxes in which you must enter subtractive or negative number, use a minus sign.

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Asked Nov 15, 2019
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Carrot Company has been profitable in the past and expects to remain profitable in the future. Carrot sells a product for which it provides a 5-year warranty. For financial reporting purposes, Carrot estimates its future warranty costs and records a warranty expense and liability at year-end, whereas for income tax purposes the company deducts its warranty costs when paid. At the beginning of the current year, Carrot had a deferred tax asset of $500 related to the warranty liability on its balance sheet. At the end of the current year, the company estimates that its ending warranty liability is $2,000

Carrot had current year taxable income of $10,000 and is subject to an enacted future tax rate of 30%.

Prepare a schedule to compute Carrot's (a) ending future deductible amount, (b) ending deferred tax asset, and (c) change in deferred tax asset for the current year (deferred tax benefit). For those boxes in which you must enter subtractive or negative number, use a minus sign.
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Expert Answer

Step 1

Taxable income is the income on which the company has to pay tax at the rate specified. A deferred tax asset refers to the amount of increase in tax refundable for future year as a result of deductible temporary difference present at the end of current year.

Step 2

a)

Calculation of ending future deductible amount:

For income tax purpose the company deducts its warranty liability when warranty costs are paid so, the amount of warranty liability is a temporary difference between the before tax financial income and taxable income. Therefore, the amount of warranty liability is ending future deductible amount.

Ending future deductible amount is $2,000

Step 3

b)

Future deductible amount: $2,000

Future tax rate: 30%

Calculati...

Ending deferred tax asset (future deductible amount x future tax rate)
= ($2,000x30%)
= $600
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Ending deferred tax asset (future deductible amount x future tax rate) = ($2,000x30%) = $600

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