© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Health Care Expense
…………………………………………
$2,375 – $2
…………………………………………….
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
12-23Solutions
12.31 j. continued.
Assets = Liabilities +
Shareholders’
Equity (Class.)
12.32 (Catiman Limited; interpreting income tax disclosures.)
(amou
nts in millions of US$)
a. 2012
Assets = Liabilities +
Shareholders’
Equity (Class.)
b. 2013
Income Tax Expense
………………………………………….
742
Income Tax Payable
736
…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+736 –742
IncSt
RE
–6 or +6
Solution12–24
c. The first line of Catiman’s tax reconciliation assumes
d. Nondeductible items increase the efective tax rate,
despite their appearing with other reconciling items with
e. A recognized pension liability or health care liability
suggests that Catiman has recognized more pension or
health care expense than the firm has contributed cash.
f. Authoritative guidance requires firms using the accrual
basis of accounting to recognize sales allowances as an
expense in the period of sale, whereas firms cannot deduct
g. Catiman increased the deferred tax asset for expected
benefits from tax loss and tax credit carryforwards. If
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
12-25Solutions
h. The decreasing amount of deferred tax liability for
temporary depreciation diferences suggests that book
depreciation exceeds tax depreciation. The likely
i. Catiman is the lessor. The reporting of a deferred
tax liability indicates that cumulative book income
exceeds cumulative taxable income. Catiman likely
12.33 (E-Drive; interpreting income tax disclosures.) (amounts in
millions of euros)
a. 2012
Income Tax Expense
4,232
Income Tax Payable
………………………………………
2,04
7
Deferred Income
T
ax
es
…………………………………..
2,18
5
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,047 –4,232
IncSt
RE
Solutions12–26
b. 2013
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Income Tax Payable
………………………………………
2,17
7
Deferred Income
T
ax
es
…………………………………..
1,72
4
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,177 –3,901
IncSt
RE
–1,724 or +1,724
c. The deferred tax amounts in Exhibit 12.23 relate not only
to amounts afecting income tax expense of the current
period but also to tax efects of items included in other
d. The first line of the tax reconciliation assumes that
e. E-Drive recognizes a deferred tax asset for underfunded
retirement plans and a deferred tax liability for overfunded
12-27Solutions
f. A deferred tax asset for expenses suggests that E-Drive
recognizes expenses earlier for financial reporting than for
tax reporting. IFRS requires firms to recognize expenses
for bad debts and warranties in the period of sale, whereas
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
g. E-Drive is the lessor. The reporting of a deferred
tax liability indicates that cumulative book income
exceeds cumulative taxable income. E-Drive likely
h. A deferred tax liability for development costs suggests
that E-Drive recognizes expenses earlier for tax reporting
than for financial reporting. IFRS requires firms to
12.34 (Dime Store; interpreting income tax disclosures.) (amounts in
millions of
US$)
a. 2011
Income Tax Expense
1,146
Income Tax Payable
Deferred Income
Deferred Income
1,05
…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+1,052 –1,146
IncSt
RE
Solutions12–28
b. 2012
1
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Assets = Liabilities +
Shareholders’
Equity (Class.)
c. 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
d. The deferred tax amounts in Exhibit 12.24 relate not only
to amounts afecting income tax expense of the current
period but also to tax efects of items included in other
balance sheet items. For example, when firms debit or
12-29Solutions
e. The first line of Dime Store’s tax reconciliation assumes
f. The deferred tax asset for health care benefits suggests
Units T
A
X D
EP
R
E
C
I
A
T
I
O N (
MAC
R
S
)
Year Acquired Y ea r 1 Y
e
a r 2 Y
e
a r 3 Y
e
a r 4 Y
e
a r 5 Y
e
a r 6 Y
e
a r 7
g. A steady deferred tax liability for temporary depreciation
diferences suggests that depreciation using the accelerated
h. Dime Store is profitable and more likely than not to
Solutions12–30
12.35 (Equilibrium Company; behavior of deferred income tax account
1 1 € 2,400 € 3,840 € 2,280 € 1,440 € 1,320 € 720
a. Annual
Depreciation
………. € 2,400 € 6,240 € 8,520 € 9,960
Yea
r
…………………………….
2
, 00
0
4
, 00
0
6
, 00
0
Difference……………………….
€
40
0
€ 2
, 24
0
€ 2
, 52
0
€
78
4
€
51
2
€
0
€
0 e. Balance of Deferred
Income Taxes ……………….
€
16
0 € 1
,05
6 € 2
,06
4 €
f. The Deferred Income Taxes account balance will remain constant
12-31Solutions
12.36 (Shiraz Company; attempts to achieve off-balance-sheet
financing.)
Transfer of Receivables with Recourse Shiraz
Company retains control of the future economic benefits of
the receivables. If interest rates decrease, Shiraz can borrow
Product Financing Arrangement Shiraz retains both the
risk and the benefit of the inventory. Shiraz Company agrees
Purchase Contract U.S. GAAP provides specialized guidance
that treats this type of purchase contract as an executory
contract and does not require its recognition as a liability.
There is a marked similarity between a product financing
Solutions12-32
12.36 continued.
future cash payments in amounts that cover the railroad’s
Construction Joint Venture The construction loan will
appear as a liability on the books of Chemical, the joint entity.
Research and Development Partnership Shiraz
guarantees the bank loan in this case regardless of the
outcome of the R & D efort and therefore must recognize a
liability. It does not matter whether Shiraz has an option or an
obligation to purchase the results of the R & D efort.
If Shiraz did not guarantee the bank loan, but instead has the
option to
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
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 loan. It appears in this case that the
probability of Shiraz having to make payments under the loan
guarantee is low. The hotel is profitable and probably
12-33Solutions
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
12-23Solutions
12.31 j. continued.
Assets = Liabilities +
Shareholders’
Equity (Class.)
12.32 (Catiman Limited; interpreting income tax disclosures.)
(amou
nts in millions of US$)
a. 2012
Assets = Liabilities +
Shareholders’
Equity (Class.)
b. 2013
Income Tax Expense
………………………………………….
742
Income Tax Payable
736
…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+736 –742
IncSt
RE
–6 or +6
Solution12–24
c. The first line of Catiman’s tax reconciliation assumes
d. Nondeductible items increase the efective tax rate,
despite their appearing with other reconciling items with
e. A recognized pension liability or health care liability
suggests that Catiman has recognized more pension or
health care expense than the firm has contributed cash.
f. Authoritative guidance requires firms using the accrual
basis of accounting to recognize sales allowances as an
expense in the period of sale, whereas firms cannot deduct
g. Catiman increased the deferred tax asset for expected
benefits from tax loss and tax credit carryforwards. If
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
12-25Solutions
h. The decreasing amount of deferred tax liability for
temporary depreciation diferences suggests that book
depreciation exceeds tax depreciation. The likely
i. Catiman is the lessor. The reporting of a deferred
tax liability indicates that cumulative book income
exceeds cumulative taxable income. Catiman likely
12.33 (E-Drive; interpreting income tax disclosures.) (amounts in
millions of euros)
a. 2012
Income Tax Expense
4,232
Income Tax Payable
………………………………………
2,04
7
Deferred Income
T
ax
es
…………………………………..
2,18
5
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,047 –4,232
IncSt
RE
Solutions12–26
b. 2013
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Income Tax Payable
………………………………………
2,17
7
Deferred Income
T
ax
es
…………………………………..
1,72
4
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,177 –3,901
IncSt
RE
–1,724 or +1,724
c. The deferred tax amounts in Exhibit 12.23 relate not only
to amounts afecting income tax expense of the current
period but also to tax efects of items included in other
d. The first line of the tax reconciliation assumes that
e. E-Drive recognizes a deferred tax asset for underfunded
retirement plans and a deferred tax liability for overfunded
12-27Solutions
f. A deferred tax asset for expenses suggests that E-Drive
recognizes expenses earlier for financial reporting than for
tax reporting. IFRS requires firms to recognize expenses
for bad debts and warranties in the period of sale, whereas
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
g. E-Drive is the lessor. The reporting of a deferred
tax liability indicates that cumulative book income
exceeds cumulative taxable income. E-Drive likely
h. A deferred tax liability for development costs suggests
that E-Drive recognizes expenses earlier for tax reporting
than for financial reporting. IFRS requires firms to
12.34 (Dime Store; interpreting income tax disclosures.) (amounts in
millions of
US$)
a. 2011
Income Tax Expense
1,146
Income Tax Payable
1,05
…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+1,052 –1,146
IncSt
RE
Solutions12–28
b. 2012
1
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Assets = Liabilities +
Shareholders’
Equity (Class.)
c. 2013
Assets = Liabilities +
Shareholders’
Equity (Class.)
d. The deferred tax amounts in Exhibit 12.24 relate not only
to amounts afecting income tax expense of the current
period but also to tax efects of items included in other
balance sheet items. For example, when firms debit or
12-29Solutions
e. The first line of Dime Store’s tax reconciliation assumes
f. The deferred tax asset for health care benefits suggests
Units T
A
X D
EP
R
E
C
I
A
T
I
O N (
MAC
R
S
)
Year Acquired Y ea r 1 Y
e
a r 2 Y
e
a r 3 Y
e
a r 4 Y
e
a r 5 Y
e
a r 6 Y
e
a r 7
g. A steady deferred tax liability for temporary depreciation
diferences suggests that depreciation using the accelerated
h. Dime Store is profitable and more likely than not to
Solutions12–30
12.35 (Equilibrium Company; behavior of deferred income tax account
1 1 € 2,400 € 3,840 € 2,280 € 1,440 € 1,320 € 720
a. Annual
Depreciation
………. € 2,400 € 6,240 € 8,520 € 9,960
Yea
r
…………………………….
2
, 00
0
4
, 00
0
6
, 00
0
Difference……………………….
€
40
0
€ 2
, 24
0
€ 2
, 52
0
€
78
4
€
51
2
€
0
€
0 e. Balance of Deferred
Income Taxes ……………….
€
16
0 € 1
,05
6 € 2
,06
4 €
f. The Deferred Income Taxes account balance will remain constant
12-31Solutions
12.36 (Shiraz Company; attempts to achieve off-balance-sheet
financing.)
Transfer of Receivables with Recourse Shiraz
Company retains control of the future economic benefits of
the receivables. If interest rates decrease, Shiraz can borrow
Product Financing Arrangement Shiraz retains both the
risk and the benefit of the inventory. Shiraz Company agrees
Purchase Contract U.S. GAAP provides specialized guidance
that treats this type of purchase contract as an executory
contract and does not require its recognition as a liability.
There is a marked similarity between a product financing
Solutions12-32
12.36 continued.
future cash payments in amounts that cover the railroad’s
Construction Joint Venture The construction loan will
appear as a liability on the books of Chemical, the joint entity.
Research and Development Partnership Shiraz
guarantees the bank loan in this case regardless of the
outcome of the R & D efort and therefore must recognize a
liability. It does not matter whether Shiraz has an option or an
obligation to purchase the results of the R & D efort.
If Shiraz did not guarantee the bank loan, but instead has the
option to
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
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 loan. It appears in this case that the
probability of Shiraz having to make payments under the loan
guarantee is low. The hotel is profitable and probably
12-33Solutions