Question

Wildhorse 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	$1470000
Estimated litigation expense	3450000
Installment sales	(2760000)
Taxable income	$2160000

The estimated litigation expense of $3450000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1380000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1380000 current and $1380000 noncurrent. The income tax rate is 20% for all years.

The deferred tax asset to be recognized is

$138000 noncurrent.

$0.

$690000 noncurrent.

$138000 current.

Answer 1

The estimated litigation expense of $3450000 will be deductible in 2022 when it is expected to be paid.

.

So, it is future taxable deduction, and create Deferred tax assets

.

Deferred tax assets = 3450000 * 20% = 690000

.

This was classified as Non- Current because expense is deductible after one year.

.

Answer : $690000 non-current.

.

Deferred tax assets

A deferred tax asset is an item on the balance sheet that results from over payment or advance payment of taxes.

.

It occurred from, An expenses that is recorded in the book but not deducted for tax purpose.

In the question, litigation expenses is deductible for accounting purpose, but income tax purpose, cannot deduct it from income, to calculate taxable income, so such items will create deferred tax assets, which is over payment of tax than tax expenses. It also reverse over the years.

If it deductible in after one year, it is classified as Non- current assets.