Question

49. Lodge Inc. reported pretax book income of $5,000,000. During the year, the company increased its reserve for warranties by $200,000. The company deducted $50,000 on its tax return related to warranty payments made during the year. What is the impact on taxable income compared to pretax book income of the book-tax difference that results from these two events

Answer 1

Answer:

Unfavorable (increases taxable income).

Explanation:

$200,000-$50,000=$150,000Unfavorable (increases taxable income)

Book income would be $150,000 less than taxable income because the company increased its reserve for warranties by $200,000 and then went ahead to deduct $50,000 on its tax return related to warranty payments made during the year which is why the impact on taxable income compared to pretax book income of the book-tax difference that results from these two events will be $150,000 Unfavorable (increases taxable income).