Question

Hopkins 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 $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2021 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. Deferred Tax Assets and Deferred Tax Liabilities are recorded in separate accounts. The income tax rate is 20% for all years. The amount of deferred tax liability to be recognized is

Answer 1

$1,200,000

Explanation:

The computation of deferred tax liability is shown below:-

Deferred tax liability = (Estimated litigation expense + Taxable amount) × Income tax rate

= ($4,000,000 + $2,000,000) × 20%

= $6,000,000 × 20%

= $1,200,000

Therefore for computing the deferred tax liability we have applied the above formula and we have not considered as they are not relevant for computing the deferred tax liability.