Question

Grouper Co. establishes a $116,000,000 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 $58,000,000 of temporary differences due to excess depreciation for tax purposes, $8,120,000 of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of $74,240,000 on $185,600,000 of taxable income in 2017. Grouper expects to have taxable income in 2018. (a) Determine the deferred taxes to be reported at the end of 2017. (b)Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $11,600,000, 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 $11,600,000 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.)

Answer 1

a) Determine deferred tax to be reported in 2017

Deferred tax have reporting in P&L and Balance sheet as well which will be as under :

Net Deferred Tax Asset at the end of 2017 to be shown in balance sheet (e=b-d)	23,200,000
Deferred tax credit to P&L in 2017 (f=b-d)	23,200,000

Working Notes :

Timing difference arising to create deferred tax asset for Site Cleaning cost deduction (a)	116,000,000
Deferred Tax Asset at 40% tax rate (b=a*40%)	46,400,000
Timing difference arising to create deferred tax liabilities for book & tax depreciation (c )	58,000,000
Deferred Tax Liabilities at 40% tax rate (d=c*40%)	23,200,000

Q.b : Income Tax expenses of 2017

Current Tax
Tax @ 40% on Income before Tax as per books	51,040,000
Deferred Tax
Deferred tax credit for timing difference arising for site cleaning cost in 2017	(46,400,000)
Deferred tax P&L debit arising from timing difference of depreciation	23,200,000
Net Deferred tax credit in P&L	(23,200,000)
Total Tax expense in P&L	27,840,000

Working Notes :

Taxable Income	185,600,000.00
Less: Site Cleaning expense not allowed for tax purpose	116,000,000.00
Add: Difference between book & Tax depreciation	58,000,000.00
Income before Tax as per books	127,600,000.00

No information is provided in respect of opening 11,600,000 liability how they are reversing during the period so no impact for the same. Further it is assumed there will be enough profitability in future to recognize deferred tax asset arising for site cleaning expense.