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

1. 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.
2. b. Did book income before taxes for financial reporting exceed or fall short of taxable income for 2008? Explain.
3. 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?
4. 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.
5. 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.
6. 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?
7. 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 the balance sheet?
8. 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?
9. i. Why does Nike recognize both deferred tax assets and deferred tax liabilities related to investments in foreign operations?