Andy McDowell Co. establishes a $100 million 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 $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2021.The enacted tax rate for all years is 20%, and the company pays taxes of $32 million on $160 million of taxable income in 2020. McDowell expects to have taxable income in 2021.Instructionsa.    Determine the deferred taxes to be reported at the end of 2020.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 2020 was a deferred tax liability of $5,000,000, 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 $5,000,000 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.)

Question
Asked Jan 27, 2020
2 views

Andy McDowell Co. establishes a $100 million 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 $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2021.

The enacted tax rate for all years is 20%, and the company pays taxes of $32 million on $160 million of taxable income in 2020. McDowell expects to have taxable income in 2021.

Instructions

a.    Determine the deferred taxes to be reported at the end of 2020.

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 2020 was a deferred tax liability of $5,000,000, 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 $5,000,000 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.)

check_circle

Expert Answer

Step 1

a. Compute deferred taxes to be reported at end of 2020 as shown below:

Accounting homework question answer, step 1, image 1
fullscreen
Step 2

b. State the reporting of deferred taxes computed in (a) as shown below:

 

Deferred tax assets are reported on current asse...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Taxation

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: On June 28 Lexicon Corporation acquired 100% of the common stock of Gulf & Eastern. The purchase...

A: Amortization of intangible assets:  Allocation of the cost of intangible assets over its service or ...

question_answer

Q: Using the information from BE19.2, assume this is the only difference between ­Oxford's pretax finan...

A: Prepare journal entry to record the income tax expense, deferred income taxes, and income taxes paya...

question_answer

Q: Both the gross profit method and the retail inventory method provide a way to estimate ending invent...

A: Gross Profit Method: Under this method, the beginning inventory is added to the net purchases during...

question_answer

Q: Francis Mayberry, M.D., maintains the accounting records of Mayberry Clinic on a cash basis. During ...

A: Meaning of Accrual basis:Accrual basis refers to the recording of accounting transaction. Under the ...

question_answer

Q: Explain the difference between pretax financial income and taxable income.

A: Pretax financial income: Income that is computed based on the records and documents presented by an ...

question_answer

Q: Journal Entries for Merchandise Transactions—Perpetual System Cushing Distributing Company uses the ...

A: Pass necessary journal entries in the books of Cushing Distributing Company.

question_answer

Q: In 2016, Winslow International, Inc.’s controller discovered that ending inventories for 2014 and 20...

A: Inventory error:Inventory errors are sometimes caused by making mistake in physical count, in pricin...

question_answer

Q: The following items appear on Brueggen Company's financial statements. 1.    Under the caption Asset...

A:   

question_answer

Q: help please

A: 1.