Easton Co. at the end of 2004, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 400,000
Estimated litigation expense 1,000,000
Installment sales (800,000)
Taxable income 600,000
The estimated litigation expense of $1,000,000 will be deductible in 2006 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $400,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $400,000 current and $400,000 noncurrent. The income tax rate is 30% for all years.
The income tax expense is
The deferred tax asset to be recognized is
B. $60,000 current.
C. $300,000 current.
D. $300,000 noncurrent.
The deferred tax liability-current to be recognized is
Litigation expense gives rise to a deferred tax asset since when the amount is deductible in future, the company will pay less tax as the taxable income will be higher. The installment sales give rise to a deferred tax ...
The solution explains the reconciliation of financial income and taxable income and the amount of deferred tax asset and liability