Interpreting Income Tax Disclosures. The financial statements of ABC Corporation, a retail chain, reveal the information for income taxes shown in Exhibit 2.15. REQUIRED a. Assuming that ABC had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2013? Explain. b. Did income before taxes for financial reporting exceed or fall short of taxable income for 2014? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2013? For 2014? d. ABC does not contract with an insurance agency for property and liability insurance; instead, it self-insures. ABC recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses. When it experiences an actual loss, it charges that loss against the liability. The income tax law permits self-insured firms to deduct such losses only in the year sustained. Why are deferred taxes related to self-insurance disclosed as a deferred tax asset instead of a deferred tax liability ? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. e. ABC treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in Inventory for tax reporting. Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. f. Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services, but claim an income tax deduction only when they make cash payments under the benefit plan. Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between 2012 and 2014. g. Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues, but claim an income tax deduction when they deem a particular customer’s accounts uncollectible. Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. h. ABC uses the straight-line depreciation method for financial reporting and accelerated depredation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2012 and 2014.

Interpreting Income Tax Disclosures. The financial statements of Nike, Inc., reveal the information regarding income taxes shown in Exhibit 2.17. REQUIRED a. Assuming that Nike had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2007? Explain. b. Did book income before taxes for financial reporting exceed or fall short of taxable income for 2008? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2008? d. Nike recognizes provisions for sales returns and doubtful accounts each year in computing income for financial reporting. Nike cannot claim an income tax deduction for these returns and doubtful accounts until customers return goods or accounts receivable become uncollectible. Why do the deferred taxes for returns and doubtful accounts appear as deferred tax assets instead of deferred tax liabilities? Suggest possible reasons why the deferred tax asset for sales returns and doubtful accounts increased between 2007 and 2008. e. Nike recognizes an expense related to deferred compensation as employees render services but cannot claim an income tax deduction until it pays cash to a retirement fund. Why do the deferred taxes for deferred compensation appear as a deferred tax asset? Suggest possible reasons why the deferred tax asset increased between 2007 and 2008. f. Nike states that it recognizes a valuation allowance on deferred tax assets related to foreign loss carryforwards because the benefits of some of these losses will expire before the firm realizes the benefits. Why might the valuation allowance have decreased slightly between 2007 and 2008? g. Nike reports a large deferred tax liability for Intangibles. In another footnote, Nike states, During the fourth quarter ended May 31, 2008 the Company completed the acquisition of Umbro Plc (Umbro). As a result, 378.4 million was allocated to unamortized trademarks, 319.2 million was allocated to goodwill and 41.1 million was allocated to other amortized intangible assets consisting of Umbros sourcing network, established customer relationships and the United Soccer League Franchise. Why would Nike report a deferred tax liability associated with this increase in intangible assets on the balance sheet? h. Nike recognizes its share of the earnings of foreign subsidiaries each year for financial reporting but recognizes income from these investments for income tax reporting only when it receives a dividend. Why do the deferred taxes related to these investments appear as a deferred tax liability? i. Why does Nike recognize both deferred tax assets and deferred tax liabilities related to investments in foreign operations?

Analyzing Coca-Colas Income Tax Disclosures Obtain The Coca-Cola Companys 2017 annual report either using the Investor Relations portion of its website (do a web search for Coca-Cola investor relations) or go to http://www.sec.gov and click Search for company filings under filings and Forms (EDGAR). Required: 1. What was the total income tax expense related to income from continuing operations before income taxes for 2017? How much of this was current? How much was deferred? 2. What were the total gross deferred tax assets at the end of 2017? Total deferred tax liabilities? Net deferred tax liability? 3. How much was the noncurrent deferred tax liability at the end of 2017, and where was it reported? 4. How much were the operating loss carryforwards at the end of 2017? Over what time periods must these be utilized?

(NOL without Valuation Account) Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2013–2019. Pretax Income (loss) Tax Rate 2013 $ 40,000 30% 2014 25,000 30% 2015 50,000 30% 2016 80,000 40% 2017 (180,000) 45% 2018 70,000 40% 2019 100,000 35% Pretax financial income (loss) and taxable income (loss) were the same for all years since Jennings began business. The tax rates from 2016–2019 were enacted in 2016. Instructions(a) Prepare the journal entries for the years 2017–2019 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryback and carryforward. Assume that Jennings elects the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the lossyear.(b) Indicate the effect the 2017 entry(ies) has on the December 31, 2017, balance sheet.(c) Prepare the portion of the income statement,…

Lewes Company appropriately uses the installment sales method for tax purposes and the accrual method for revenue recognition for accounting purposes. Pertinent data at December 31, 2016, the close of the first year of operations, are as follows: Revenue Recognized Revenue Recognized Customer for Accounting Purposes for Tax Purposes Lowe's Builders $200,000 $100,000 Top Down Plumbing 500,000 350,000 Glass Plus Windows 600,000 350,000 Lewes's tax rate is 30%. What amount should be included in the deferred tax account at December 31, 2016 for these installment sales?

BDO Company reported the following on December 31, 2015: Income before tax for accounting purposes P12,000,000; Rent expense for financial accounting purposes is P2,000,000 Rent expense for tax purposes is P1,000,000; Tax depreciation is P3,200,000 Accounting depreciation is P1,700,000; Loss on a case incurred but not yet paid so tax-deductible in the future is P700,000. The tax rate is 30%. Question: What is the amount of deferred tax asset? What is the net income after tax?

BDO Company reported the following on December 31, 2015: Income before tax for accounting purposes P12,000,000; Rent expense for financial accounting purposes is P2,000,000 Rent expense for tax purposes is P1,000,000; Tax depreciation is P3,200,000 Accounting depreciation is P1,700,000; Loss on a case incurred but not yet paid so tax-deductible in the future is P700,000. The tax rate is 30%. Question: What is the amount of the deferred tax expense? What is the amount of deferred tax asset?

BDO Company reported the following on December 31, 2015: Income before tax for accounting purposes P12,000,000; Rent expense for financial accounting purposes is P2,000,000 Rent expense for tax purposes is P1,000,000; Tax depreciation is P3,200,000 Accounting depreciation is P1,700,000; Loss on a case incurred but not yet paid so tax-deductible in the future is P700,000. The tax rate is 30%. What is the net income after tax?

The pretax financial income (or loss) figures for Martinez Company are as follows. 2012 $148,000 2013 275,000 2014 83,000 2015 (148,000 ) 2016 (362,000 ) 2017 115,000 2018 104,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2012 and 2013 and a 40% tax rate for the remaining years.Prepare the journal entries for the years 2014 to 2018 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Martinez Company uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

x Company reports the following pretax income (loss) for both book and tax purposes. Year. Pretax income tax rate 2018 120,000 20% 2019 93,000 20% 2020. (82,000) 25% 2021 110,000 25% The tax rates listed were enacted by the beginning of 2018 Prepare the journal entries for years 2018-2021 to record income tax expense (benefit) and income taxes payable and the tax effects of the loss carryforward assuming that based on the weight of available evidence it is more likely than not that one half of the benefits of the loss carryforward will not be realized.

The pretax financial income (or loss) figures for Jenny Spangler Company are as follows. 2015 $160,000 2016 250,000 2017 80,000 2018 (160,000 ) 2019 (380,000 ) 2020 120,000 2021 100,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 25% tax rate for 2015 and 2016 and a 20% tax rate for the remaining years.Prepare the journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

The pretax financial income (or loss) figures for Marin Company are as follows. 2015 $161,000 2016 248,000 2017 76,000 2018 (161,000 ) 2019 (390,000 ) 2020 119,000 2021 95,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 25% tax rate for 2015 and 2016 and a 20% tax rate for the remaining years.Prepare the journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

do not copy he pretax financial income (or loss) figures for Tamarisk Company are as follows. 2017 78,000 2018 ( 43,000 ) 2019 ( 38,000 ) 2020 115,000 2021 106,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 25% tax rate for 2017 and a 20% tax rate for the remaining years.Prepare the journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

Solution Summary: The author identifies the reasons behind change in amounts of deferred tax assets related to self-insurance between the years 2012 and 2014 for Company AC.

Concept explainers

Videos

Chapter 2 Solutions