Shamess Co. establishes a $90 million liability at the end of 2012 for the estimated litigation settlement for manufacturing defects. All related costs will be paid and deducted on the tax return in 2013. Also, at the end of 2012, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2013.

   The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2012. Shamess expects to have taxable income in 2013.

Instructions
  (a) Determine the deferred taxes to be reported at the end of 2012.
  (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 2012 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2012, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial income.)