Deferred Taxes

Due to contingent liabilities, many companies report different amounts of income on their income statement than on their income tax return, which leads to deferred income tax balances. A company is required to accrue a contingent liability if it is probable that the liability has been incurred and the amount can be estimated. This case study focuses on accounting implications of the most common contingencies—warranties and lawsuits—at Maytag Corporation, a leading manufacturer of home and commercial appliances.

Under the accrual accounting method, estimated warranty costs are charged to operating expenses in the year of sales, and a corresponding liability is established. This liability is reduced when the actual warranty charges are incurred. The notes on the financial statements reveal that in 2004 Maytag estimated $132,841 in warranty liability and made $121,162 in warranty payments. Therefore, the warranty reserve at the end of fiscal 2004 totaled to $114,905 (Exhibit 1). In addition, there was another contingency Maytag had to record in 2004 due to a front-load washer litigation settlement. The Income Statement reveals that the amount was reasonably predicted to be $33,500 (Exhibit 2). However,