Use the following information for questions.
Hopkins Co.at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid.Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years.The income tax rate is 30% for all years.
-Stephens Company has a deductible temporary difference of $2,000,000 at the end of its first year of operations.Its tax rate is 40 percent.Stephens has $1,800,000 of income taxes payable.At the end of the first year, after a careful review of all available evidence, Stephens determines that it is probable that it will not realize $200,000 of this deferred tax asset.At the end of the second year of operations, Stephens Company determines that it expects to realize $1,850,000 of this deferred tax assets.On Stephens Company's statement of financial position at the end of its second year of operations, what is the amount of deferred tax asset?

Question

Use the following information for questions.
Hopkins Co.at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
  
The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid.Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years.The income tax rate is 30% for all years.
-Stephens Company has a deductible temporary difference of $2,000,000 at the end of its first year of operations.Its tax rate is 40 percent.Stephens has $1,800,000 of income taxes payable.At the end of the first year, after a careful review of all available evidence, Stephens determines that it is probable that it will not realize $200,000 of this deferred tax asset.At the end of the second year of operations, Stephens Company determines that it expects to realize $1,850,000 of this deferred tax assets.On Stephens Company's statement of financial position at the end of its second year of operations, what is the amount of deferred tax asset?

Quizplus · Accepted Answer

At the end of the first year, Stephens has a deductible temporary difference of $2,000,000, which results in a deferred tax asset of $800,000 ($2,000,000 x 40%). However, it is likely that $200,000 of this deferred tax asset will not be realized, leaving a net deferred tax asset of $600,000 ($800,000 - $200,000). 
At the end of the second year, Stephens expects to realize $1,850,000 of the deferred tax asset. Therefore, the net deferred tax asset on the statement of financial position will be $740,000 ($600,000 + $1,850,000 - $1,710,000 income taxes payable).

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