Question

Athis Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:Pretax financial income $ 1,200,000Estimated litigation expense 3,000,000Installment sales (2,400,000)Taxable income $ 1,800,000The 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 in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1, 200,000 noncurrent, The income tax rate is 30% for years.

Find the income tax expense, the deffered tax asset to be recognized, and the defferred tax liablitiy to be recognized.

Answer 1

The answer is given below;

Step-by-step explanation:

Income Tax Payable =1,800,000*30%=$540,000

Deferred Tax Asset=3,000,000*30%=$900,000

Deferred Tax liability=2,400,000*30%=$720,000

Therefore the income tax expense=$540,000+$720,000-$900,000=$360,000

The litigation expense will be deductible from taxable income when paid,therefore it will give deferred tax asset.

Profit on installment sales will give rise to more profits being subjected to taxes,therefore it gives rise to deferred tax liability.