Consider the following income tax footnote information for the E. I. du Pont de Nemours and Company.

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a. What is the total amount of income tax expense that DuPont reports in its 2007 income statement? What portion of this expense does DuPont expect to pay in 2008?

b. Explain how the deferred tax liability called "depreciation" arises? Under what circumstances will the company settle this liability? Under what circumstances might this liability be deferred indefinitely?

c. Explain how the deferred tax asset called "accrued employee benefits" arises? Why is it recognized as an asset?

d. Explain how the deferred tax asset called "tax loss/tax credit carryforwards/backs" arises. Under what circumstances will DuPont realize the benefits of this asset?

e. DuPont reports a 2007 valuation allowance of \(\$ 1,424\) million. How does this valuation allowance arise? How did the change in valuation allowance for 2007 affect net income? Valuation allowances typically relate to questions about the realizability of tax loss carryforwards. Under what circumstances might DuPont not realize the benefits if its tax loss carry forwards?

f. DuPont reports an effective tax rate of \(20 \%, 5.9 \%\), and \(41.3 \%\) in 2007,2006 , and 2005, respectively. What factors caused the marked change in the effective tax rate from 2005 to 2006? From 2006 to 2007? What tax rate would seem reasonable to use when projecting DuPont's income statement for 2008? Explain.

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Provision for Income Taxes ($ millions) 2007 2006 2005 Current tax expense (benefit) U.S. federal.... $357 $505 $ 699 U.S. state and local. 13 (1) 13 International. 379 307 649 749 811 1,361 Deferred tax expense (benefit) U.S. federal...... 63 (297) 204 U.S. state and local. (24) (18) (13) International.. (40) (300) (82) (1) (615) 109 Provision for income taxes.... $748 $196 $1,470 The significant components of deferred tax assets and liabilities at December 31, 2007 and 2006, are as follows: 2007 2006 ($ millions) Asset Liability Asset Liability Depreciation..... $ - $1,392 $ - $1,380 Accrued employee benefits 1,469 196 2,302 137 Other accrued expenses 1,225 656 934 489 Inventories... 238 121 169 49 Unrealized exchange gains 81 43 Tax loss/tax credit carryforwards/backs 2,830 2,602 Investment in subsidiaries and affiliates.. 38 338 31 337 Amortization of intangibles... 92 643 75 661 Other... 201 128 348 206 $6,174 $3,474 $6,504 $3,259 Valuation allowance. (1,424) (1,467) $4,750 $5,037 An analysis of the company's effective income tax rate (EITR) follows: 2007 2006 2005 Statutory U.S. federal income tax rate. 35.0% 35.0% 35.0% Exchange gains/losses. (0.9) 0.6 9.4 Domestic operations... (3.2) 0.1 (1.4) Lower effective tax rates on international operations-net (7.5) (12.4) (6.8) Tax settlements.... (3.4) (10.4) (1.4) Lower effective tax rate on export sales (0.8) (1.0) The American Jobs Creation Act of 2004 (AJCA). (0.6) 8.2 Valuation allowance release... (5.6) (0.7) 20.0% 5.9% 41.3% 1 Principally reflects the benefit of non-taxable exchange gains resulting from remeasurement of foreign currency denominated monetary assets and liabilities. Further information about the company's foreign currency hedging program is included in Note 23 under the heading Currency Risk.