Tower Corp. began operations on January 1, 2005. For financial reporting, Tower recognizes revenues from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method. Tower’s gross profit on these installment sales under each method was as follows:

Year

Accrual method

Installment method

2005

$1,600,000

$ 600,000

2006

2,600,000

1,400,000

The income tax rate is 30% for 2005 and future years. There are no other temporary or permanent differences. In its December 31, 2006 balance sheet, what amount should Tower report as a liability for deferred income taxes?

  1. $840,000
  2. $660,000
  3. $600,000
  4. $360,000