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In: Accounting

Mathis Co. at the end of 2012, its first year of operations, prepared a reconciliation between...

Mathis Co. at the end of 2012, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $ 600,000

Estimated litigation expense 1,500,000

Installment sales (1,200,000)

Taxable income $ 900,000

The estimated litigation expense of $1,500,000 will be deductible in 2014 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $600,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $600,000 current and $600,000 noncurrent. The income tax rate is 30% for all years.

4. The income tax expense is

a. $180,000.

b. $270,000.

c. $300,000.

d. $600,000.

5. The deferred tax asset to be recognized is

a. $0.

b. $90,000 current.

c. $450,000 current.

d. $450,000 noncurrent.

Expert Solution

4)

Income tax Expense
        =    [Taxable Income (+)change in deferred Tax liability (-) change in deferred Tax Asset] x Tax Rate
       = ($900,000 +$1,200,000 (-) $1,500,000) x 30%
       = $300,000 x 30%
       = $180,000

Income tax Expense =$180,000

5) Deferred tax asset   =   Estimated litigation expense x Tax Rate
                                             =    $1,500,000 x 30%
                                            =     $450,000 (Non Current)
Since Estimated liability for Litigation is Non-Current

Deferred tax asset = $450,000 (Non Current)

ekkarill92 answered 2 years ago

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