Question

Crane Co. establishes a $142,000,000 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 $71,000,000 of temporary differences due to excess depreciation for tax purposes, $9,940,000 of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of $90,880,000 on $227,200,000 of taxable income in 2017. Crane expects to have taxable income in 2018.

Answer 1

Solution:

Pretax financial income = Taxable income - Liability for estimated expenses + Excess depreciation for tax purpose

= $227,200,000 - $142,000,000 + ($71,000,000 - $14,200,000/40%) =  = $120,700,000

Deferred tax assets for the year = $142,000,000*40% = $56,800,000

Deferred tax liability to be recognized for the year = $71,000,000 * 40% - $14,200,000 = $14,200,000

Net deferred tax benefit to be recognized in income statement = $56,800,000 - $14,200,000 = $42,600,000

Crane Co. Income Statement (Partial) For the year ended December 31, 2017
Particulars		Amount
Income before income taxes		$120,700,000.00
Income tax expense
Current	$90,880,000.00
Deferred	-$42,600,000.00	$48,280,000.00
Net Income (Loss)		$72,420,000.00