Hefner Co. at the end of 2008, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
The estimated litigation expense of $1,250,000 will be deductible in 2010 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years.
-The income tax expense is

Question

Hefner Co. at the end of 2008, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
  The estimated litigation expense of $1,250,000 will be deductible in 2010 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years.
-The income tax expense is

Quizplus · Accepted Answer

Income tax payable = ($750,000 × 30%) = $225,000
Change in deferred tax liability = ($1,000,000 × 30%) = $300,000 
Change in deferred tax asset = ($ 1,250,000 × 30%) = $375,000 
$225,000 + $300,000 - $375,000 = $150,000.

Hefner Co at the End of 2008, Its First Year of of Operations