Problem 1 Luo Ltd. establishes a 90 million liability at the end of 2019 for...
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Problem 1 Luo Ltd. establishes a 90 million liability at the end of 2019 for the estimated litigation settlement for manufacturing defects. All related costs will be paid and deducted on the tax return in 2020. Also, at the end of 2019, the company has the balance of 50 million of temporary differences due to excess depreciation for tax purposes, 7 million of which will reverse in 2020. The enacted tax rate for all years is 40%, and the company pays taxes of 64 million on X160 million of taxable income in 2019. Luo expects to have taxable income in 2020. Instructions a. Determine the deferred taxes to be reported at the end of 2019. b. Assuming that the only deferred tax account at the beginning of 2019 was a deferred tax liability of 10,000,000, draft the income tax expense section of the income statement for 2019, beginning with the line Income before income taxes. (Hint: To calculate the pretax financial income, you need to 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, and then (3) the amount of pretax financial income.)
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