Mill, which began operations on January 1, 2004, recognizes income from long-term construction contracts under the percentage-of-completion method in its financial statements and under the completed-contract method for income tax reporting. Income under each method follows:

Year

Completed-contract

Percentage-of-completion

2004

$

$300,000

2005

400,000

600,000

2006

700,000

850,000

The income tax rate was 30% for 2004 through 2006. For years after 2006, the enacted tax rate is 25%. There are no other temporary differences. Mill should report in its December 31, 2006 balance sheet a deferred income tax liability of

  1. $ 87,500
  2. $105,000
  3. $162,500
  4. $195,000