soverby

Thanks Mj. That was my reasoning too, but the assertion in the solution was trying to make me think more into it.

soverby

Problem 66 CFAI MOCK AM:
Yes, A higher expense (warranty expense) on the Financial statements for reporting will reduce the EBT and result in paying lower taxes for financial reporting purpose.
But in tax book, which looks at actual cash payments  The Income (EBT) is reported more than what is reported in the financial statements because of the lower warranty expenses (actual expenditure) in the tax books. Therefore you pay more cash in taxes to the tax authority than what you have shown in the financial statements for reporting. This results in a prepaid expense (tax expense) is an asset.
Mj.. let me know if it makes sense.