978-0078025679 Chapter 13 Solution Manual Part 4

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is in “steady–state,” whereby its fixed asset acquisitions are just sufficient to

replace its assets going out of service, it has no net change in deferred tax

liabilities related to fixed assets.

Intangible assets other than nondeductible goodwill: This deferred tax liability

arose because amortization is recognized faster for tax purposes than for financial

carryforwards incurred in 2012 exceeded carryforwards used. Although Pepsico

is profitable overall, it can still have carryforwards if they pertain to jurisdictions

where Pepsico is not profitable. For example, the company could have a foreign

subsidiary that is incurring losses. Those losses may not be used to offset U.S.

taxable income and therefore create carryforwards that may be used when the

option vesting period for financial reporting. However, no tax deduction is

permitted until the options are exercised, which must be after the vesting period is

over. (See Chapter 15.)

Retiree medical benefits, Other employee-related benefits: In both of these

cases, there is a deferred tax asset because expense is recognized earlier than a

Pension benefits: Pension benefits, like other benefits, are accrued over an

employee’s working year for financial statement purposes. However, pension

plans generally create an income tax deduction when contributions are made to

the plan. The firm does not have to wait until the benefit payment is made to take

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comprehensive income (through pension expense and other comprehensive

income) than the amount of the tax deduction that has been taken. The amount

of the deferred tax asset increased, indicating net originating temporary

differences. (See Chapter 14.)

C13-2. Google Inc.: Analyzing tax notes

Requirement 1:

($ in millions)

DR Income tax expense $2,598

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Requirement 4:

Let X = taxable income as per tax return ($ in millions)

Income Tax Payable = Statutory Tax Rate * X

$2,871 = .35X

X = $8,209.9

2012, so depreciation and amortization for tax purposes exceeded the

amount for financial reporting.

Let Z = difference between tax return and book income ($ in millions)

Increase in DTL = Statutory Tax Rate x Z

$761 – $479 = .35Z

income tax rate on foreign income is, on average, lower than the 35% U.S. rate.

Although the U.S. taxes worldwide income of U.S. companies (after allowing a

credit for foreign taxes paid), it does not impose the tax until the earnings are

repatriated. Firms that have deemed their foreign earnings to be permanently

reinvested overseas do not accrue income tax expense for the additional taxes

C13-3. Motorola vs. Intel: Adjusting for depreciation differences

Requirement 1:

Begin by looking at the edited financial statement disclosures from the Year 2

10K of Motorola, which shows the balances in the sub-components of

the deferred tax account. The highlighted depreciation item reflects the

$213 million cumulative deferred tax liability arising from book versus tax

depreciation expense at December 31, Year 2. The liability rose by

Therefore,

$45.7 = (Tax depreciation – Book depreciation)

Since the edited financial statement disclosures show Motorola’s book

depreciation was $2,308 million, tax depreciation must have been $2,308

million + $45.7 million = $2,353.7 million.

or:

$98 = (Tax Depreciation – Book Depreciation) x .35

or:

$280 = (Tax Depreciation – Book Depreciation)

Intel’s book depreciation was $1,888 million (from disclosures), so tax

depreciation must have been $1,888 million + $280 million = $2,168 million.

Requirement 2:

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Requirement 3:

The adjusted figures are not affected by variations in depreciation reporting

C13-4. ABC Inc.: Interpreting tax notes and reconciling statutory and effective rates

Requirement 1:

Tax Amount

Tax Rate

Tax expense at statutory rate of 35%

$3,812

35.00%

Amortization of cost in excess of net assets

of acquired companies

1,076

9.88%

State taxes

927

8.51%

Change in the valuation allowance for

deferred tax assets

(2,122)

-19.48%

Others

(426)

– 3.91%

Tax provision at actual rate

$3,267

30.00%

Requirement 2:

DR Income tax expense

$3,267

DR Valuation allowance

2,122

CR Income tax payable

$1,756

CR Deferred tax liability

2,000

CR Deferred tax asset

1,634

$5,389

$5,390

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The credit to the income tax liability represents the current portion of the

income tax expense. The decrease in the deferred tax asset ($47,652 –

$49,286) and the increase in the deferred tax liability ($12,957 – $10,957)

are obtained from comparing the 2014 and 2013 balance sheet values. The

one dollar difference between the total debit and total credit appears to be

The deferred tax asset for inventories is due to additional costs inventoried

for tax purposes and financial statement allowances. It appears that certain

costs that are considered as product costs for tax purposes are considered

as period costs for financial reporting purposes. In addition, it seems that

certain writedown of inventories (financial statement allowances) are not

book values at the end of 2011 for tax purposes, whereas they have been

expensed in the financial statements as part of operating expenses. Thus, the

increase in the deferred tax asset for inventories is consistent with the

inventory buildup indicated by the change in the balance sheet value from

2013 to 2014.

expense during 2014. Another possibility to consider is that, since the

company has gone through significant restructuring, the reduction in the

deferred tax asset might be indicative of the reduction in the liability for

employee benefits from contract renegotiations. In fact, the income statement

of the company reported a $6,000 credit from reduction in the employee

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The deferred tax asset for accrual for disposal of discontinued operations was

created to record the expected tax benefit from the loss on discontinued

operations reported in the GAAP financial statements of the previous years.

The reduction in this deferred tax asset suggests that a portion of the loss

C13-5. Understanding tax note disclosures

Requirement 1:

($ in millions)

DR Income tax expense $674.4

$674.4 = .328 X

$2,056.1 = X

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Requirement 4:

The tax jurisdictions in which the firm chooses to operate—indicated by the

3.3 percentage point reduction in the effective tax rate attributed to foreign tax

rates—account for much of the difference between Starbucks’ effective tax

rate and the U.S. statutory tax rate. Note that Starbucks may choose to

C13-6. Using tax note disclosures to forecast next year’s tax provision

Note: All dollar amounts in this discussion are in thousands.

631.9%. This very unusual effective tax rate results because of the reversal of the

valuation allowance. As a result, this effective tax rate is not useful for forecasting

Requirements 4 and 5:

($ in thousands)

Forecasted income before income taxes $498,191

Forecasted income tax expense:

Income before income taxes x 41.6% 207,247

Less: Reversal of remaining valuation allowance 9,800 197,447

Forecasted net income $300,744

Forecasted 2013

C13-7 Interpreting FIN48 disclosures

Requirement 1:

$17.1 million minus $15.3 million, or $1.8 million.

C13-8: Tax note under IFRS

Requirement 1:

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Lufthansa was not able to capitalize €498 million of deferred tax assets because

management did not deem it likely that those assets would be realized. This

amount is analogous to what Lufthansa would have reported for a valuation