Oriole Co. at the end of 2017, its first year of operations, prepared a reconcil

Question

Oriole Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows Pretax financial income Estimated litigation expense Extra depreciation for taxes Taxable income $2505000 3505000 (5514000) $496000 The estimated litigation expense of $3505000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1838000 in each of the next 3 years. The income tax rate is 40% for all years. The deferred tax asset to be recognized is $198400 $735200. $1002000 $1402000

Explanation / Answer

Deferred tax assets: it is generated due to the non-deductible expenses in current year and deductible in future years.

Deferred tax liability: It is generated due to the deductible expenses in current year but to be recognized in financial statements at future years.

So in the present case there is non-deductible expense of litigation expense - $3,505,000 and tax saved on this amount in 2018 is 3505000 x 40% = 1402000, so DTA to be recognized is $1,402,000 Ans d

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