Question

Exercise 19-17

Kevin McDowell Co. establishes a $144,000,000 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 $72,000,000 of temporary differences due to excess depreciation for tax purposes, $10,080,000 of which will reverse in 2021.

The enacted tax rate for all years is 20%, and the company pays taxes of $46,080,000 on $230,400,000 of taxable income in 2020. McDowell expects to have taxable income in 2021.

Assuming that the only deferred tax account at the beginning of 2020 was a deferred tax liability of $7,200,000, draft the income tax expense portion of the income statement for 2020, beginning with the line "Income before income taxes." (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $7,200,000 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.) (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Kevin McDowell Co. Income Statement (Partial) For the Year Ended December 31, 2020 Income before Income Taxes $ Income Tax Expense Current X Deferred TNet Income / (Loss) Click you would like to Show Work for this question: Open Show Work

Answer 1

Solution:

Income statement (Partial) for the year ended December 31,2020
Income before income taxes		$122,400,000
Income tax expense:
Current	$46,080,000
Deferred ($28,800,000) -($14,400,000 -$7,200,000)	$21,600,000
		$24,480,000
Net income / loss		$97,920,000

Working:

Taxable income	$230,400,000
Less: Temporary Difference - Liability (Deferred tax assets)	($144,000,000)
Add: Excess temporary difference ($7,200,000/20%)	$36,000,000
Income before income taxes	$122,400,000

Deferred tax assets : $144,000,000*20% =$28,800,000

Deferred tax liability: $72,000,000*20% =$14,400,000

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