Answer:
Warranty liability at 12/31/13 = $2 million.
This means that the balance in the deferred tax asset should be $700,000
(35% x $2,000,000) = $700,000
Before adjustment, the balance in the deferred tax asset is $737,500.
Therefore, the deferred tax asset needs to be reduced (credited) by $37,500.
($700,000 - 737,500) = -37,500
Date Account Title Dr Cr
12-31-13 Tax expense 14,037,500
Deferred tax asset 37,500
Taxes payable (.35 x 40,000,000) 14,000,000
