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    Reconcile financial income and taxable income

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    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

    A. $120,000.
    B. $180,000.
    C. $200,000.
    D. $400,000.

    The deferred tax asset to be recognized is
    A. $0.
    B. $60,000 current.
    C. $300,000 current.
    D. $300,000 noncurrent.

    The deferred tax liability-current to be recognized is
    A. $60,000.
    B. $90,000.
    C. $120,000.
    D. $240,000.

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    Solution Preview

    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 ...

    Solution Summary

    The solution explains the reconciliation of financial income and taxable income and the amount of deferred tax asset and liability