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.
-Link Sink Manufacturing has a deferred tax asset account with a balance of $300,000 at the end of 2012 due to a single cumulative temporary difference of $750,000.At the end of 2013, this same temporary difference has increased to a cumulative amount of $1,000,000.Taxable income for 2013 is $1,700,000.The tax rate is 40% for all years.Assuming it's probable that 70% of the deferred tax asset will be realized, what amount will be reported on Link Sink's statement of financial position for the deferred tax asset at December 31, 2013?

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.
-Link Sink Manufacturing has a deferred tax asset account with a balance of $300,000 at the end of 2012 due to a single cumulative temporary difference of $750,000.At the end of 2013, this same temporary difference has increased to a cumulative amount of $1,000,000.Taxable income for 2013 is $1,700,000.The tax rate is 40% for all years.Assuming it's probable that 70% of the deferred tax asset will be realized, what amount will be reported on Link Sink's statement of financial position for the deferred tax asset at December 31, 2013?

Quizplus · Accepted Answer

The deferred tax asset balance at the end of 2012 was $300,000, which was based on a single temporary difference of $750,000. The increase in the temporary difference to $1,000,000 at the end of 2013 means that the deferred tax asset balance should be adjusted upward. The deferred tax asset is calculated as:

Temporary difference at the end of 2013 = $1,000,000 
Tax rate = 40% 
Deferred tax asset = $1,000,000 x 40% = $400,000

However, it is probable that only 70% of the deferred tax asset will be realized, so the amount that will be reported on the statement of financial position is:

$400,000 x 70% = $280,000

Therefore, the best choice is B.

Use the Following Information for Questions