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Black Co., organized on January 2, year 1, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, year 1. The only temporary difference is accrued product warranty costs that are expected to be paid as follows:
Year 2 $100,000
Year 3 50,000
Year 4 50,000
Year 5 100,000
Black has never had any net operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The enacted income tax rates are 35% for year 1, 30% for year 2 through year 4, and 25% for year 5. In Black’s December 31, year 1 balance sheet, the deferred income tax asset should be