At the end of 2020, its first year of operations, Gaucho Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r }
\text { Pre-tax account ing income } & \$ 800,000 \
\text { Estimated lawsuit expense } & 400,000 \
\text { Excess CCA for tax purposes } & ( 900,000 ) \
\text { Taxable income } & \$ 300,000
\end{array}$$ The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Gaucho adheres to IFRS requirements. The deferred tax asset to be recorded is

Question

At the end of 2020, its first year of operations, Gaucho Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } 
\text { Pre-tax account ing income } & \$ 800,000 \
\text { Estimated lawsuit expense } & 400,000 \
\text { Excess CCA for tax purposes } & ( 900,000 ) \
\text { Taxable income } & \$ 300,000
\end{array}$$ The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Gaucho adheres to IFRS requirements. The deferred tax asset to be recorded is

Quizplus · Accepted Answer

The deferred tax asset related to the lawsuit expense is calculated as $400,000 * 25% = $100,000. This is because the lawsuit expense is recognized for accounting purposes in 2020 but will be deductible for tax purposes in 2021, creating a temporary difference that results in a deferred tax asset.

At the End of 2020, Its First Year of Operations