Sunland 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 $1410000 Estimated litigation expense 3050000 Installment sales (1880000) Taxable income $2580000 The estimated litigation expense of $3050000 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 $940000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $940000 current and $940000 noncurrent. The income tax rate is 30% for all years. The deferred tax liability to be recognized is

$1479000.

$564000.

$282000.

$774000.

Question

Makai Nelson

Business

6 February, 18:13

Sunland 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 $1410000 Estimated litigation expense 3050000 Installment sales (1880000) Taxable income $2580000 The estimated litigation expense of $3050000 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 $940000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $940000 current and $940000 noncurrent. The income tax rate is 30% for all years. The deferred tax liability to be recognized is

$1479000.

$564000.

$282000.

$774000.

+2

Answers (1)

Know the Answer?

Valeria Poole · Answer 1

Deferred Tax Liability = $564,000

Explanation:

The question is to determine the deferred tax liability to recognize by Sunland Co. at the end of the year 2017.

Step 1:

We determine what the Income tax expense is for the year

Income tax expense = Pretax financial income x Income Tax rate

Income tax expense = $1,410,000 x 0.30 = $423,000

Step 2:

Although we recognized receivables as well as instalmental sales for reporting purposes under the accrual method. However, these will be subject to tax when we decide to recognize it in the future.

As such Deferred tax liability = Future Tax Liability

Deferred Tax liability for Sunland Co = Instalmental Sales x Income tax expense

= $1,880,000 x 0.3 = $564,000