Question

Mathis 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 $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales profit (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized, and thus taxed, in the amount of $1,200,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax liability to be recognized is:

Answer 1

$900,000

Step-by-step explanation:

The estimated litigation expense of $3,000,000 will be multiplied by the income tax rate for all the years which is 30%.

Hence,

($3,000,000 × 30%) = $900,000

Therefore the deferred tax liability to be recognized is:

$900,000