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405quiz3summer2011solution - Computations below Mathis Co...

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Computations below. Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000 ) Taxable income $ 750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 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. 1. The income tax expense is a. $150,000. b. $225,000. c. $250,000. d. $500,000. 2. The deferred tax asset to be recognized is a. $0. b. $75,000 current. c. $375,000 current. d. $375,000 noncurrent. D 3. The deferred tax liability—current to be recognized is a. $75,000. b. $225,000. c. $150,000. d. $300,000. The following information relates to questions 4 and 5. Cooper Construction Company had a contract starting April 2010, to construct a $9,000,000 building that is expected to be completed in September 2012, at an
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