Response to the following problem:
Gillette Company, maker of shaving products and many other personal products, showed a net income of $1.428 billion in 1998 and $1.427 billion in 1997 on page one of its 1998 annual report. A note to the 1998 income said that the 1998 income of $1.428 billion was to be reduced $347 million due to reorganization and realignment expenses. Consistent with this, the net income in the consolidated statement of income for 1998 was $1.081 billion.
In addition, following information appeared in the footnotes for the 1998 corporate annual report (figures are in millions).
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1998
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1997
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Noncurrent deferred tax assets:
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Benefit plans
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$180
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$163
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Merger related costs
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13
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12
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Operating loss and credit carry forwards
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31
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33
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Valuation allowance
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(29)
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(31)
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Net noncurrent deferred tax assets
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$195
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$177
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Required:
a. Why do you think Gillette initially showed its income for 1998 to be $1.428 billion? Discuss.
b. Is the expensing of the reorganization and realignment costs of $347 million after taxes for 1998 correct? Explain.
c. What is the valuation allowance?
d. Why do you think Gillette maintains this account?
e. Do you think that earnings management is being used by Gillette?