Suggestions for Class Activities
1. Target Analysis
Have students, individually or in groups, go to Target’s most recent annual report at Target’s
website. Ask them to:
1. Determine the temporary difference that for Target creates the largest deferred assets and
deferred tax liabilities. Given what you know about Target, why do you suppose these are
the largest contributors? Is the total net deferred tax asset or liability getting larger or
smaller? Why?
2. Compare deferred taxes reported with those in the January 30, 2016, report that
accompanied the text. Are there any discernible trends? How might they be interpreted?
Points to Note:
In the year ended January 30, 2016, the temporary difference creating the largest deferred tax
asset was accrued and deferred compensation, which makes sense given Target’s large
workforce. The fact that this temporary difference gives rise to a deferred tax asset indicates that
Target was recognizing expenses for accounting purposes earlier than they were for tax purposes.
The temporary difference creating the largest deferred tax liability was property and equipment.
Once again, this is not surprising, since Target likely owns many stores and takes accelerated
depreciation for tax purposes.
In the year ended January 30, 2016, Target had a net deferred tax liability. That net deferred
tax liability had declined slightly from the prior year, primarily due to a reduction in deferred tax
liability associated with property and equipment.
2. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Case 16–5, Trueblood Cases 16–11 and
16–12, Real World Case 16–6, Judgment Case 16–10, Integrating Cases 16–2 and 16–4,
and Problem 16–7 do well as group assignments. The Target Case, Judgment Case 16–10,
and Integrating Cases 16–2 and 16–4 are suitable for student presentation(s). Integrating
Cases 16–2 and 16–4, Research Case 16–7, and Question 16–6 create good class
discussions.
Research Skills. The “Broaden Your Perspective” section includes Research Cases that direct
students to locate and extract relevant information from available resource material to
determine the correct accounting practice, perhaps identifying the appropriate authoritative
literature to support a decision. Research Case 16–7 provides an excellent opportunity to
help students develop this skill. In addition, Analysis Case 16–9 requires students to
research the way Kroger reports deferred taxes. Exercises 16–12 and 16–31 provide
excellent practice researching the Accounting Standards Codification.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for
making business and investment decisions. In addition to the Target Case, the Air
France–KLM Case, Analysis Cases 16–1, 16–8, and 16–9, Exercise 16–14, Problems 16–3
and 16–11, Real World Case 16–6, and Integrating Cases 16–2 and 16–4 also provide
opportunities to develop analysis skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision making and provide an appropriate conclusion. In
addition to Judgment Cases 16–10 and 16–13, Trueblood Cases 16–11 and 16–12 and
Integrating Case 16–4 also require students to exercise professional judgment.
3. Real World Scenario
In RadioShack’s 2013 annual report, the company reported deferred tax assets of $259.3
million, offset by a valuation allowance of $228.8 million. Disclosure note 10 reported, in part:
“We had deferred tax assets associated with our federal net operating losses, which will
expire in 2033, of $132 million as of December 31, 2013. … We continue to provide a
valuation allowance against all of our U.S. federal and state deferred tax assets in 2013. …
We considered all available positive and negative evidence in evaluating whether these
deferred tax assets were more likely than not to be realized. The significant negative evidence
of our losses generated before income taxes in 2012 and the unfavorable shift in our business
could not be overcome by considering other sources of taxable income, which included the
reversal of taxable temporary differences and tax-planning strategies.”
Suggestion:
Ask students to consider the following questions:
1. As a potential investor, what significance would you place on the existence of operating
loss carryforwards?
2. What might contribute to RadioShack’s need to record a valuation allowance?
Points to Note:
Deferred tax assets represent future tax savings. Operating loss carryforwards create deferred
tax assets that can reflect sizable potential tax deductions. RadioShack has large operating loss
carryforwards, signifying that a large amount of future income can be earned tax-free. This is a
tax shelter that should not be overlooked by a potential investor.
Of course, the reason RadioShack has those NOL carryforwards is because it has been running
large losses, so an investor also would be concerned that RadioShack will continue to not be
profitable. The fact that RadioShack has set aside such a large valuation allowance indicates that
it does not believe it is more likely than not that those deferred tax assets will be realized by
2033, suggesting the company might not survive long enough to return to profitability and
realize the benefit of those deferred tax assets.
Radio Shack ultimately filed for bankruptcy in 2015 and was sold to Standard General.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
16–1 1,2 Temporary difference 5
16–2 1,2 Temporary difference 5
16–3 2 Future deductible amounts 5
16–4 3 Valuation allowance 5
16–5 4 Permanent differences 5
16–6 4 Permanent differences 5
16–7 5 Corporate tax rate change 5
16–8 5 Corporate tax rate change 5
16–9 7 Loss carrybacks and loss carryforwards 5
16–10 8 Classifying deferred taxes 5
16–11 8 Financial statement disclosures 5
16–12 8 Financial statement disclosures 5
16–13 9 Uncertainty 5
16–14 10 Intraperiod tax allocation 5
16–15 11 IFRS 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
16–1 1 Temporary difference 5
16–2 1 Temporary difference; determine taxable
income; determine prior year deferred tax
amount
5
16–3 2 Temporary difference 5
16–4 2 Temporary difference; income tax payable given 5
16–5 2 Temporary difference; income tax payable given 5
16–6 2,3 Valuation allowance 5
16–7 2,3 Valuation allowance 5
16–8 1,4 Temporary and permanent differences;
determine deferred tax consequences
5
16–9 1,4 Calculate taxable income 5
16–10 5 Multiple tax rates 5
16–11 5 Change in tax rates 5
16–12 7 Net operating loss carryforward 5
16–13 7 Net operating loss carryback 5
16–14 9 Tax uncertainty 5
16–15 10 Intraperiod tax allocation 5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
16–1 1 Temporary difference; taxable income given 10
16–2 1 Determine taxable income; determine prior year
deferred tax amount
15
16–3 1 Taxable income given; calculate deferred tax
liability
15
16–4 2 Temporary difference; income tax payable given 10
16–5 2 Temporary difference; future deductible
amounts; taxable income given
15
16–6 1,2 Identify future taxable amounts and future
deductible amounts
25
16–7 1,2 Identify future taxable amounts and future
deductible amounts
15
16–8 1,2 Calculate income tax amounts under various
circumstances
35
16–9 1,2 Determine taxable income 20
16–10 3 Deferred tax asset; taxable income given;
valuation allowance
20
16–11 3 Deferred tax asset; income tax payable given;
previous balance in valuation allowance
20
16–12 3 FASB codification research; valuation allowance 15
16–13 1,4,6 Multiple differences; calculate taxable income 20
16–14 4,6 Multiple differences 25
16–15 2,5 Multiple tax rates 25
16–16 1,5 Change in tax rates; calculate taxable income 35
16–17 1,5 Deferred taxes; change in tax rates 25
16–18 6 Multiple temporary differences; record income
taxes
15
16–19 6 Multiple temporary differences; record income
taxes
20
16–20 7 Net operating loss carryforward 15
16–21 7 Net operating loss carryback 15
16–22 7 Operating loss carryback and carryforward 20
16–23 1,2,4,7 Identifying income tax deferrals 15
16–24 4,5,6,8 Multiple temporary differences; balance sheet
presentation
20
16–25 1,4,5 Multiple tax rates 25
16–26
16–27
1,2,4,5,6
8
Multiple difference; multiple tax rates
Balance sheet classification
35
20
16–28 1,2,3,4,5,6,
7,8
Concepts; terminology 20
16–29 9 Tax credit; uncertainty regarding sustainability 15
16–30 10 Intraperiod tax allocation 15
16–31 5,8,10 FASB codification research 15
Learning Est.
time
Problems Objective(s) Topic
(min.)
16–1 1 Single temporary difference originates
each year for four years
30
16–2 2 Temporary difference; determine deferred
tax amount for three years
25
16–3 1,5 Change in tax rate; single temporary
difference
25
16–4 1,5 Change in tax rate; record taxes for four
years
30
16–5 1,4,5 Change in tax rate; record taxes for four
years
45
16–6 5,6 Multiple differences; temporary
difference yet to originate; multiple tax
rates
45
16–7 4,6,8 Multiple differences; calculate taxable
income; balance sheet classification
50
16–8 4,6,8 Multiple differences; taxable income
given; two years; balance sheet
classification; change in tax rate
60
16–9 6 Determine deferred tax assets and
liabilities
45
16–10 2,4,7 Net operating loss carryback and
carryforward; multiple differences
20
16–11 3 Valuation allowance; Delta Air Lines 60
16–12 1,5,8 Integrating problem—bonds, leases, taxes 60
16–13 3,4,6,9 Multiple differences; uncertain tax
position
60
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Analysis Case 16–1 1,2,3,4,5,6,
7,8
Basic concepts 20
Integrating Case 16–2 2 Postretirement benefits 15
Integrating Case 16–3 1,2,8 Tax effects of accounting changes and error
correction; six situations
20
Communication Case 16–4 1,4,5 Deferred taxes; changing rates; write a memo 75
Real World Case 16–5 1,2,8 Disclosure issues; balance sheet classifications;
Walmart
30
Research Case 16–6 1,2,3,8 Researching the way tax deductions are
reported on a corporation tax return; retrieving
a tax form from the Internet
45
Analysis Case 16–7 1,2,3,7 Reporting deferred taxes; Ford Motor Company 25
Analysis Case 16–8 1,2,3,7,8 Reporting deferred taxes; Kroger Co. 35
Judgment Case 16–9 8 Analyzing the effect of deferred tax liabilities
on firm risk; Macy’s, Inc.
45
Trueblood Accounting Case
16–10
Trueblood Accounting Case
16–11
3
9
Valuation allowances against deferred tax
assets
Uncertain tax positions
40
40
Judgment Case 16–12 10 Intraperiod tax allocation 25
Target Case
Air France–KLM Case
1,2,4,8,9
11 IFRS; accounting for income taxes; Air
France–KLM
30