Question

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $3,000,000

Estimated litigation expense                                           4,000,000

Extra depreciation for taxes                                          (6,000,000)

Taxable income   $1,000,000

1). The estimated litigation expense of $4,000,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 21% for all years.

What amount will Hopkins report as deferred taxes?

$420,000 liability

$210,000 liability

$210,000 asset

$630,000 asset

2).

For calendar year 2020, Kane Corp. reported depreciation of $1,600,000 in its income statement. On its 2020 income tax return, Kane reported depreciation of $2,400,000. Kane's income statement also included $300,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's taxable income was $5,200,000, and the enacted tax rates are 21% for 2020 and 24% for 2021 and thereafter. The depreciation difference and warranty expense will reverse over the next three years as follows:

                 Depreciation Difference             Warranty Expense

2021                      $320,000                              $ 60,000

2022                        280,000                                100,000

2023                        200,000                                140,000

                             $800,000                              $300,000

Kane previously had no deferred taxes, and these were Kane's only temporary differences. In Kane's 2020 income statement, income tax expense should be

$ 987,000

$1,665,000

$1,750,000

1,212,000

Answer 1

1) Answer is $420,000 Liability Timing Difference Deferred Tax Tax rate Deferred tax asset Estimated litigation expense $4,000,000 21% $840,000 Deferred tax liability Depreciation Deferred tax liability (net) -$6,000,000 21% -$1,260,000 -$420,000 2) Answer is $1,212,000 Income tax expense = Current tax expense + Deferred tax expense $1,092,000 $5,200,000*21% $192,000 24% of $800,000 Current tax expense Add:Deferred tax liability Depreciation Less: Deferred tax assets Warranty expenses Income tax expense -$72,000 24% of $300,000 $1,212,000