Chapter 6, Problem 20PC

In 2009, Bratz, Inc.’s net profit before tax was P35 million while its operating expenses was P31 million. In 2010, its net profit before tax was P40 million and its operating expenses was P38 million. It did not declare dividends for 2009 and 2010. And it has no proposed capital expenditures for 2011 and the immediate future. May Bratz be subject to the improperly accumulated tax on its retained profits for 2009 and 2010? * Yes, since the accumulated amounts are reasonable for operations in relation to what it usually needed annually. B. No, because the taxpayer is not shown to be a publicly-listed corporation, a bank, or an insurance company. No, because there is no showing that the taxpayer's 2009 and 2010 net profit before tax exceeded its paid-up capital. Yes, since the accumulation is not reasonably necessary for the immediate needs of the business.

In the notes to its 2009 fi nancial statements, SAP Group describes its deferred income as follows: Deferred income consists mainly of prepayments made by our customers for support services and professional services, fees for multiple element arrangements allocated to undelivered elements, and amounts . . . for obligations to perform under acquired support contracts in connection with acquisitions. Apple’s deferred revenue arises from sales involving components, some delivered at the time of sale and others to be delivered in the future. In its 2009 fi nancial statements, Apple Inc. explains that accounting for sale of some of its products is treated as two deliverables: . . . Th e fi rst deliverable is the hardware and software delivered at the time of sale, and the second deliverable is the right included with the purchase of iPhone and Apple TV to receive on a when-and-if-available basis future unspecifi ed software upgrades and features relating to the product’s software . . . the…

Chanon, Inc. is a supplier of office equipments to the government. The company has recently delivered P2,000,000 worth of equipments but remains unpaid as of date. Yesterday, the company received a Final Assessment Notice from the Bureau of Internal Revenue for deficiency taxes and penalties amounting to P2,000,000. Can Chanon opt not to pay BIR? a. Yes, as the receivable and the tax liability can be set-off as the other party is also the government. b. No, as Chanon can still avail of its judicial remedies. c. Yes, as the claim against the government arose first. d. No, as Chanon's claim is a debt and the government's claim is taxes. These cannot be set-off.

Dow Chemical Company provides chemical, plastic, and agricultural products and services to various consumer markets. The following excerpt is taken from the disclosure notes of Dow’s annual report.DOW CHEMICALNotes to the Financial Statements (excerpt)Dow Chemical had accrued obligations of $381 million for environmental remediation and restoration costs, including $40 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration.Required: 1. Does the excerpt describe a contingent liability? 2. Under what…

Chanon, Inc. is a supplier of office equipments to the government. The company has recently delivered P2,000,000 worth of equipments but remains unpaid as of date. Yesterday, the company received a Final Assessment Notice from the Bureau of Internal Revenue for deficiency taxes and penalties amounting to P2,000,000. Can Chanon opt not to pay BIR? Yes, as the claim against the government arose first.   Yes, as the receivable and the tax liability can be set-off as the other party is also the government.   No, as Chanon can still avail of its judicial remedies.   No, as Chanon's claim is a debt and the government's claim is taxes. These cannot be set-off.

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2016 financial statements are issued on March 15, 2017. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2017, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. b. In November 2015, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2017, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that…

In September​ 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield up to​ 100% of their future income from taxes​ (prior law restricted the ability of acquirers to use these​ credits). Suppose Fargo Bank acquired Covia Bank and with it acquired $58 billion in tax loss carryforwards. If Fargo Bank was expected to generate taxable income of $8 billion per year in the​ future, and its tax rate was 30%​, what was the present value of these acquired tax loss carryforwards given a cost of capital of ​8%? How would the present value change under current law which restricts the amount of the deduction to 80% of​ pre-tax income? Question content area bottom Part 1 If Fargo Bank was expected to generate taxable income of $8 billion per year in the​ future, and its tax rate was 30%​, what was the present value of these acquired tax loss carryforwards given a cost of capital of ​8%? The present value of these acquired tax loss…

Fore Farms reported a pretax operating loss of $150 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $10 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $20 million from accruing a loss contingency. The loss will be tax deductible when paid in 2022. The enacted tax rate is 25%. There were no temporary differences at the beginning of the year and none originating in 2021 other than those described above.  Required:1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2021.2. What is the net operating loss reported in 2021 income statement?3. Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is $155 million. No additional temporary differences originate in 2022.

Fore Farms reported a pretax operating loss of $300 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $4 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $20 million from accruing a loss contingency. The loss will be tax deductible when paid in 2022. The enacted tax rate is 25%. There were no temporary differences at the beginning of the year and none originating in 2021 other than those described above. Taxable income in Fores’s two previous years of operation was as follows:         2019 $ 136 million 2020 $ 112 million    Required:1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2021. Assume Fore will carry back its NOL to prior years.2. What is the net operating loss reported in 2021 income statement?3. Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is…