Ivanhoe Co. at the end of 2017, its first year of operations, prepared a reconci

Question

Ivanhoe Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

The estimated litigation expense of $3200000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1420000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1420000 current and $1420000 noncurrent. The income tax rate is 30% for all years.

The deferred tax liability to be recognized is

Pretax financial income $1290000 Estimated litigation expense 3200000 Installment sales (2840000) Taxable income $1650000

Explanation / Answer

Deferred tax liability = Negative temporary difference * Future tax rate

= 2,840,000 * 30%

= 852,000

The deferred tax liability to be recognized = 852,000

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