Information for questions 6. and 7. Mathhias Co. at the end of 2018, its first y
ID: 2527662 • Letter: I
Question
Information for questions 6. and 7. Mathhias Co. at the end of 2018, 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
Taxable income 2,100,000
The estimated litigation expense of $1,500,000 will be deductible in 2020 when it is expected
to be paid. The estimated liability for litigation is classified as noncurrent. The income tax rate
is 30% for all years.
6. The income tax expense is
a. $180,000.
b. $270,000.
c. $300,000.
d. $600,000.
7. The deferred tax asset to be recognized is
a. $0.
b. $90,000 current.
c. $450,000 current.
d. $450,000 noncurrent.
Explanation / Answer
Solution 6:
Income tax expense for 2018 = Income tax payable - Deferred tax assets = ($2,100,000 *30%) - ($1,500,000*30%) = $180,000
Hence option a is correct.
Solution 7:
Deferred tax assets to be recoganized in 2018 = $1,500,000 * 30% = $450,000
As temporary differences are reversible in 2020, therefore deferred assets to be classified in balance sheet as non current.
Hence option d is correct.