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Deferred Tax Asset and Deferred Tax Liability

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At the beginning of Year 1, Dowen Company purchases a machine costing $6,000 with a 3-year estimated service life and no salvage value. For financial reporting (book) purposes, Dowen uses straight-line depreciation with a 3-year life. For income tax reporting, the machine is depreciated with a 2-year life. The machine is used to manufacture a product that will generate annual revenue of $5,000 for three years. Warranty expenses are estimated at 10% of revenues each year; all repairs are provided in Year 3. The tax rate is 40% in all three years. What is the balance at the end of Year 2 of Dowen's deferred tax asset and deferred tax liability?

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Solution Summary

This solution discusses deferred tax assets and deferred tax liabilities.

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The difference between Pretax income and taxable income is from depreciation and Warranty expenses.
In counting the Pretax income, the ...

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