Tommy Corp

question 85

Multiple Choice

Tommy Corp. reported a net deferred tax asset balance of $176,400 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to the bases of the estimated warranty liability is $490,000. The enacted statutory tax rate related to this balance changed from 36% to 31%, effective immediately. By what amount will the deferred asset balance change?

• A) increase by $33,320
• B) decrease by $24,500
• C) increase by $24,500
• D) decrease by $33,320

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Definitions:

Replacement Cost

The cost to replace an item or asset at current prices, disregarding its original purchase price or accumulated depreciation.

Operating Margin

A profitability measure calculated as operating income divided by revenue, showing the percentage of profits generated from operations before taxes and interest.

Variable Costing

An accounting method that only includes variable production costs (costs that change with the level of output) in the cost of goods sold and treats fixed costs as period costs.

Absorption Costing

A pricing technique that integrates all expenses related to production, such as direct materials, direct labor, along with both variable and fixed overhead costs, into a product's cost.