Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $800,000

Estimated litigation expense 2,000,000

Installment sales (1,600,000)

Taxable income $1,200,000

The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is

A) $240,000

B) $360,000

C) $400,000

D) $800,000

Question

Business

Natasha Shelton

7 April, 21:47

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $800,000

Estimated litigation expense 2,000,000

Installment sales (1,600,000)

Taxable income $1,200,000

The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is

A) $240,000

B) $360,000

C) $400,000

D) $800,000

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Answers (1)

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Audrina · Answer 1

A) $240,000

Explanation:

Deferred tax asset is an asset recognized when taxable income and hence tax paid in current period is higher than the tax amount worked out based on accrual basis or where loss carryforward is available. It's classification as current or noncurrent highly depends on the classification of the asset or liability that gave rise to it.

$800,000*30% = $800,000 * 0.3 = $240,000

The deferred tax asset to be recognized is $240,000