At the end of 2017, its first year of operations, Rinaldo Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: The estimated lawsuit expense of $750,000 will be deductible in 2019 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax asset to be recorded is

Question

At the end of 2017, its first year of operations, Rinaldo Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:  The estimated lawsuit expense of $750,000 will be deductible in 2019 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax asset to be recorded is

Quizplus · Accepted Answer

To calculate the deferred tax asset, we need to determine the timing differences between when an expense is recognized on the income statement and when it is deductible for tax purposes.

One timing difference in this problem is the estimated lawsuit expense of $750,000. This expense is recognized on the income statement in 2017 but will not be deductible for tax purposes until it is paid in 2019. Therefore, this creates a temporary difference of $750,000, which will result in a deferred tax asset.

To calculate the deferred tax asset, we need to multiply the temporary difference by the tax rate. In this case, the deferred tax asset would be:

$750,000 x 30% = $225,000

Therefore, the answer is (D) $225,000.

At the End of 2017, Its First Year of Operations