Question

Use the following information to answer Questions 7 through 9 Thimphu Company prepared the following reconciliation between pretax financial accounting income and taxable income for the year ending December 31, 20X0, its first year of operations. Pretax Financial Accounting Income Estimated Litigation Expense Installment Sales Gross Profit Taxable Income 200,000 500,000 400,000) 300,000 The estimated litigation expense of $500,000 will be deductible in 20X2 when it is expected to be paid. The gross profit from the installment sales Will be realized in the amount of $200,000 in 20X1 and 20X2. The income tax rate is 30% for all years. 7. What is the income tax expense for 20X0? (a) $200,000. (b) 60,000. (c) 90,000 (d) $100,000. 8. What is the deferred tax asset that should be recognized on the balance sheet at December 31, 20XO? (a) $150,000 current. (b) S 30,000 current. (c) $150,000 noncurrent. (d) S 60,000 current 9. What is the amount of deferred taxes that should be recognized as a currert liability at December 31, 20x0? (a) 60,000. (b) $120,000 (c) 30,000. (d) $ 90,000.

Answer 1

Answers -

Q.7 - Option (b): $60,000

Q.8 - Option (c): $150,000 (non-current)

Q.9 - Option (a): $60,000

Workings:

Pre tax Finance Accounting Income Taxable Income A Income tax expense for 20X0? $200,000 300,000 Current tax expense -Taxable Income * Tax Rate (%) = $300,000 * 30% -$90,000 Deferred tax expense - ($400,000 * 30%)-($500,000 30%) (Deferred tax liability on installment sales gross profit and Deferred tax asset on estimated litigation expense) -$120,000 $150,000 S30,000 Income Tax ExpenseCurrent tax expense(+) Deferred tax expense $90,000 ( () S30,000 $60,000 B) Deferred tax asset as at 31 December, 20X0? Deferred tax asset will be created in estimated litigation expense $500,000 * 30% $150,000 (Non-current) This was classified as non-current because expense is deductible after one year i.e. in 20X2 C) Deferred tax liability (current) as at 31 December, 20X0? Deferred tax liability will be created for installment sales gross profit $400,000 * 30% -$120,000 Since, the question's requirement is only current liability-Deferred tax liability will be created only on portion of gross profit taxable in next one year i.e. 20X1 ($200,000) Deferred taxes to be recognised as current liability will be $200,000 * 30% (or) $120,000 /2 ie. $60,000