(Solved) : Two Differences One Rate Beginning Deferred Balance . . .

(Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income) Shamess Co. establishes a $90 million liability at the end of 2010 for the estimated litigation settlement for manufacturing defects. All related costs will be paid and deducted on the tax return in 2011. Also, at the end of 2010, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2011.

The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2010. Shamess expects to have taxable income in 2011.

(a) Determine the deferred taxes to be reported at the end of 2010.

(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 2010 was a deferred tax liability of $10,000,000 draft the income tax expense portion of the income statement for 2010, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial income.)

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