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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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Chapter 2, Problem 19PC
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 ofdeferred 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 Umbro’s 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 thebalance 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?
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Where in its December 31, 2015, balance sheet does AF report deferred taxes? Howdoes this approach differ from the way deferred taxes are reported using U.S. GAAP?Using the Internet, determine how deferred taxes would be reported using IFRS atthe time of your research. Explain why that approach might differ from the way AFreported deferred taxes at December 31, 2015.
1. Which of the following statements is incorrect regarding deferred taxes?
a. Income tax payable plus or minus the change in deferred income taxes equals total income tax expense.
b. The deferred portion of income tax expense is the amount of change in deferred taxes related to the current period.
c. In computing income tax expense, a company deducts an increase in a deferred tax liability to income tax payable.
d. All of the choices are incorrect.
2. A liability in 2021 is reported for financial reporting purposes but not for tax purposes. When this liability is settled in 2022, a future taxable amount will:
a. pretax financial income will exceed taxable income in 2022.
b. the Company will record a decrease in a deferred tax liability in 2022.
c. total income tax expense for 2022 will exceed current tax expense for 2022.
d. will not be affected.
3. Assuming a 35% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a…
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Chapter 2 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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