Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Textbook Question
Chapter 2, Problem 17PC
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 adeferred 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.
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Access the 2016 financial statements and related disclosure notes of Ford Motor Company from its
website at corporate.ford.com. Required: 1. In Note 21, find Ford's net deferred tax asset or liability. What
is that number? 2. Does Ford show a valuation allowance against deferred tax assets? If so, what is the
number, and what is Ford's explanation for it? 3-a. Does Ford have any NOL carryforwards? 3-b. What is
the amount of any carryforward, what deferred tax asset or liability is associated with it? (Round your
answer to 1 decimal place.) 3-c. What effective tax rate does that imply was used to calculate its deferred
tax effect?
Nalad Corp. provided the following data related to accounting and taxable income:
Pre-tax accounting income (financial statements)
Taxable income (tax return)
Income tax rate
20X8
$530,000
20X9
$505,000
305,000
730,000
38%
38%
There are no existing temporary differences other than those reflected in these data. There are no permanent differences.
Required:
1-a. How much tax expense would be reported in each year if the taxes payable method was used?
Tax Expense
20X8
20X9
1-b. What is the implied tax rate? (Round your answers to 1 decimal place.)
20X8
20X9
Implied tax rate
96
%
2-a. How much tax expense would be reported using comprehensive tax allocation (liability method).
Tax Expense
20X8
20X9
2-b. How much deferred income tax would be reported using comprehensive tax allocation (liability method).
ILLUSTRATION 1. Compute the tax payable by a company for the Assessment year 2012-13 if
(a) its total income is $ 4,00,000 and book profit is $ 15,00,000 ; or
(b) its total income is $ 6,20,000 and book profit is $ 10,00,000.
Chapter 2 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 2 - Prob. 1QECh. 2 - Asset Valuation and Income Recognition. Asset...Ch. 2 - Trade-Offs among Acceptable Accounting...Ch. 2 - Income Flows versus Cash Flows. The text states,...Ch. 2 - Prob. 5QECh. 2 - Prob. 6QECh. 2 - Prob. 7QECh. 2 - Prob. 8QECh. 2 - Computation of Income Tax Expense. A firms income...Ch. 2 - Computation of Income Tax Expense. A firms income...
Ch. 2 - Costs to Be Included in Historical Cost Valuation....Ch. 2 - Effect of Valuation Method for Nonmonetary Asset...Ch. 2 - Prob. 13PCCh. 2 - Prob. 14PCCh. 2 - Prob. 15PCCh. 2 - Deferred Tax Assets. Components of the deferred...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Interpreting Income Tax Disclosures. Prepaid Legal...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Analyzing Transactions. Using the analytical...Ch. 2 - Prob. 21PCCh. 2 - Starbucks The financial statements of Starbucks...Ch. 2 - Prob. 1BICCh. 2 - Prob. 1CICCh. 2 - Prob. 1DICCh. 2 - Prob. 1EICCh. 2 - Prob. 1FICCh. 2 - Starbucks The financial statements of Starbucks...
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