Lance Lawn Services reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when the cost is incurred. At December 31, 2013, Lance has a warranty liability of $2 million and taxable income of $40 million. At December 31, 2012, Lance reported a deferred tax asset of $737,500 related to this difference in reporting warranties, its only temporary difference. The enacted tax rate is 35% each year

Required:
Prepare the appropriate journal entry to record Lance

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

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