At the End of 2020, Its First Year of Operations

question 8

Multiple Choice

At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 300,000 \\\text { Estimated lawsuit expense } & 750,000 \\\text { Instalment sales } & ( 600,000 ) \\\text { Taxable income } & \$ 450,000\end{array}$$ The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax liability to be recorded is

• A) $ 180,000.
• B) $ 90,000.
• C) $ 67,500.
• D) $ 45,000.

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Definitions:

Liable

Legally responsible for something, usually resulting in a requirement to compensate for harm or damage caused.

Accommodation Party

An individual who signs a negotiable instrument to lend their credit to another party without receiving a direct benefit.

Shaky Financial Condition

A term describing the unstable or uncertain financial state of an entity, characterized by insufficient cash flow, high debt, or other financial difficulties.

Indorser

A person who signs a document, typically a check or negotiable instrument, indicating their agreement or approval.