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Intermediate Accounting (Kieso)
Found in: Page 1099

Short Answer

Andy McDowell Co. establishes a $100 million liability at the end of 2017 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 2018. Also, at the end of 2017, the company has $50 million 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 $64 million on $160 million of taxable income in 2017. McDowell expects to have taxable income in 2018. Instructions (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 “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, and then (3) the amount of pretax financial income.)

Closing costs are the expenditure an organization incurs while closing a deal related to the investment decision made by the firm. This type of cost is generally incurred in the real-estate industry.

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Step by Step Solution

(a) Preparation of the deferred tax schedule

Temporary difference


Tax rate

Deferred tax asset

Deferred tax liability

Balance sheet


Estimated cost of books

$100 million


($40 million)

Estimated payable


Excess depreciation

$50 million


$20 million

Plan assets


(b) Indication of the amounts

Balance Sheet



Long-term liabilities

Deferred tax liability

$20 million



Current assets

Deferred tax assets

$40 million

(c) Income statement

Income statement



Income before income taxes

$85 million

Less: income tax expense


$64 million


($30 million)

$34 million

Net Income

$51 million

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