Solutions 11–34
11.33 continued.
e. A recognized pension liability or health care liability suggests that a
firm has recognized more pension or health care expense than the firm
f. GAAP requires firms using the accrual basis of accounting to
g. This firm increased the deferred tax asset for expected benefits from
tax loss and tax credit carryforwards. If the entity that realized the
h. The decreasing amount of deferred tax liability for temporary
depreciation differences suggests that book depreciation exceeds tax
i. This firm is the lessor. The reporting of a deferred tax liability
11–35 Solutions
11.34 (Interpreting income tax disclosures.) (Amounts in Millions)
a. 2007
Income Tax Expense ………………………………………… 4,232
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,047
–4,232
IncSt → RE
–2,185
or
+2,185
To record income tax expense, income tax payable,
b. 2008
Income Tax Expense ………………………………………… 3,901
Deferred Income Taxes …………………………………. 1,724
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,177
–3,901
IncSt → RE
–1,724
or
+1,724
To record income tax expense, income tax payable,
and the change in deferred income taxes for 2008.
c. The deferred tax amounts in Exhibit 11.23 in the text relate not only
d. The first line of the tax reconciliation assumes that governmental
Solutions 11–36
11–37 Solutions
11.34 continued.
e. This firm recognizes a deferred tax asset for underfunded retirement
plans and a deferred tax liability for overfunded retirement plans.
f. A deferred tax asset for expenses suggests this firm recognizes
expenses earlier for financial reporting than for tax reporting. GAAP
g. This firm is the lessor. The reporting of a deferred tax liability
h. A deferred tax liability for software development costs suggests that
11.35 (Interpreting income tax disclosures.) (Amounts in Millions)
a. 2006
Income Tax Expense ………………………………………… 1,146
Solutions 11–38
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,052
–1,146
IncSt → RE
–94
or
+94
To record income tax expense, income tax payable,
11–39 Solutions
11.35 continued.
b. 2007
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–122
or
–122
–1,452
IncSt → RE
+1,574
To record income tax expense, income tax payable,
and the change in deferred income taxes for 2007.
c. 2008
Income Tax Expense ………………………………………… 1,710
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–201
or
–201
–1,710
IncSt → RE
+1,911
To record income tax expense, income tax payable,
d. The deferred tax amounts in Exhibit 11.24 in the text relate not only to
amounts affecting income tax expense of the current period but also to
e. The first line of the tax reconciliation assumes that governmental
entities tax income before income taxes at 35%. However, 35% is only
Solutions 11–40
11.35 continued.
f. The deferred tax asset for health care benefits suggests that this firm
has an underfunded health care plan. This firm has recognized more
health care expenses than it has contributed cash to the health care
g. A steady deferred tax liability for temporary depreciation differences
suggests that depreciation using the accelerated method for tax
11–41 Solutions
11.36 (Equilibrium Company; behavior of deferred income tax account when a firm acquires new assets
every year.)
Units TAX DEPRECIATION (MACRS)
Year Acquired Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
a. Annual Depreciation ……… $ 2,400 $ 6,240 $ 8,520 $ 9,960 $ 11,280 $ 12,000 $ 12,000
Year …………………………... 2,000 4,000 6,000 8,000 10,000 12,000 12,000
d. Increase in Deferred Tax
(40%) ………………………….. $ 160 $ 896 $ 1,008 $ 784 $ 512 $ 0 $ 0
Solutions 11–42
11.37 (Shiraz Company; attempts to achieve off-balance-sheet financing.)
Transfer of Receivables with Recourse SFAS No. 140 sets out the
following criteria to treat a transfer of receivables with recourse as a sale:
(1) the arrangement separates the receivables from the seller (Shiraz), (2)
the purchaser of the receivables (Credit Company) is free to sell or
Shiraz Company retains control of the future economic benefits. If
interest rates decrease, Shiraz can borrow funds at the lower interest rate
Product Financing Arrangement SFAS No. 49 (1981) provides that
firms recognize product financing arrangements as liabilities if (1) the
arrangement requires the sponsoring firm (Shiraz) to purchase the
inventory at specified prices and (2) the payments made to the other entity
Throughput Contract SFAS Statement No. 49 (1981) treats throughput
contracts as executory contracts and does not require their recognition as a
11–43 Solutions
Solutions 11–44
11.37 continued.
ments in amounts that cover the railroad’s operating and financing costs.
Construction Joint Venture The construction loan will appear as a
liability on the books of Chemical, the joint entity. Shiraz will recognize
the fair value of its loan guarantee as a liability. Shiraz and Mission each
Research and Development Partnership SFAS No. 68 (1982) requires
firms to recognize financings related to research and development (R & D)
as liabilities if (1) the sponsoring firm (Shiraz) must repay the financing
11–45 Solutions
11.37 continued.
Hotel Financing Shiraz Company will recognize a liability for the fair
value of its guarantee, which is likely to be less than the amount of the
Solutions 11–46