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.”