Question

James McDowell Co. establishes a $102,000,000 liability at the end of 2020 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2021. Also, at the end of 2020, the company has $51,000,000 of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of $160 million of taxable income in 2017. McDowell expects to have taxable inome in 2018.
a. Determine the deferred taxes to be reported at the end of 2017.
b. Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.
c. Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line "Inconme before income taxes."

Answer 1

Answer:

Task a:

Deferred tax asset = $40,800,000

Deferred tax liability = $20,400,000

Task b:

Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.

Note: Please see the attachments for the balance sheet*

Task c:

Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line "Income before income taxes."

Please see the attachments for the Income statement*

Explanation:

Task a:

Determine the deferred taxes to be reported at the end of 2017.

Deferred tax asset

Deferred tax asset = $102,000,000 × 40%

Deferred tax asset = $40,800,000 (answer)

Deferred tax liability

Deferred tax liability = $51,000,000 × 40%

Deferred tax liability = $20,400,000 (answer)

Task b:

Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.

Explanation:

Deferred tax asset

• When income tax expense is smaller than income tax payable as a result of deducting any non-cash expenses in accounting books, some income tax expense is deferred to the future.
• The larger income tax payable on tax returns creates a deferred tax asset, which companies can use to pay for deferred income tax expense in the future.
• Deferred tax assets may be presented as current assets if a temporary difference between accounting income and taxable income is reconciled the following year.

Deferred tax liability

• When income tax expense is greater than income tax payable as a result of no recognition of any noncash revenues in tax returns, some income payable is deferred to the future.
• The smaller income tax payable on tax returns creates a deferred tax liability, which companies must meet by paying any deferred income tax payable in the future.
• Deferred liabilities may be presented as current liabilities if a temporary difference between accounting income and taxable income is reconciled the following year.

Note: The balance sheet extract is attached:

Task c:

Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line "Income before income taxes."

Note: The income statement extract is attached:

Note: The relevant working also attached