(Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income) Low4All Stores establishes a $200 million liability at the end of 2014 for the estimated costs to settle a class-action lawsuit alleging discrimination. The settlement is expected to be approved by the Court in 2015 at which time the settlement will be paid. The company also has $125 million of temporary differences the end of 2014 due to installment sales. The $125 million will reverse in equal installments over the next five years.
The enacted tax rate for all years is 40%, and the company has $351 million of taxable income in 2014.
Low4All Stores expects to have taxable income in 2015.
Instructions
(a) Determine the deferred taxes to be reported at the end of 2014.
(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 2014 was a deferred tax liability of $60 million; draft the income tax expense portion of the income statement for 2014, beginning with the line "Income before income taxes." (Hint:You must first compute (1) the amount of temporary difference underlying the beginning $60 million deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial income.)