Question

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:Pretax financial income...................$3,000,000Estimated litigation expense...........4,000,000Extra depreciation for taxes...........(6,000,000)Taxable income........................................$100,000The estimated litigation expense of $4,000,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 30% for all years.The deferred tax liability to be recognized is1. $900,000.2. $1,200,000.3. $1,800,000.4. $1,500,000.

Answer 1

$1,200,000

Step-by-step explanation:

Estimated Letigation Expenses 4,000,000.00

Tax Rate 30%

Deferred Tax Assets 1,200,000.00

Estimated Litigation Expenses which is disallowed for tax purposes will be future deductible expenses when we will make the actual payment of the liability. So the Tax liability in the future year will decrease, so we will make the Deferred Tax Assets for this.

Therefore, The deferred tax liability to be recognized is 1,200,000