Reading 38: Income Taxes-LOS h 习题精选

Permanent tax differences such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences in the effective and statutory tax rates.

Comparability decreases when the comparison period is relatively short (e.g. quarters vs. years), with the presence of volatility in the effective tax rate over the comparison period, and operations in different tax jurisdictions.

On a tax basis, first-year depreciation will be ($25.352 million × 0.35) = $8,873,200.
Pre-tax income will be ($14,384,000 – $8,873,200) = $5,510,800.
At a 41% tax rate, tax payable in year one would be ($5,510,800 × 0.41) = $2.259 million.

If the Red Monkey uses straight-line depreciation in its reported results, the annual depreciation expense on financial statements will be ($25.352 million / 5 years) = $5,070,400 per year. Pre-tax income (ignoring depreciation) will be ($14,384,000 revenue ? $5,070,400 depreciation) = $9,313,600. At a 41% tax rate, reported income each year will equal ((1 – 0.41) × $9,313,600) = $5,495,024, ignoring expenses other than depreciation. Patel’s statement is correct.

On a tax basis, first-year depreciation will be ($25.352 million × 0.35) = $8,873,200 and pre-tax income will be ($14,384,000 – $8,873,200) = $5,510,800, again ignoring expenses other than depreciation. At a 41% tax rate, the after-tax income of the Red Monkey will be [(1 – 0.41) × $5,510,800] = $3,251,372. Jayagopal’s statement is also correct.

Deferred tax assets that are unlikely to be reversed should be subtracted from equity, not added to it. Deferred tax liabilities should be discounted to present value and treated as liabilities if they are likely, not unlikely, to reverse. If the deferred tax liability is unlikely to reverse, the difference between the reported value and present value is added to equity.

Although it is true that the Red Monkey will be renovating the décor frequently, it will not be investing in décor as rapidly as it depreciates it for tax purposes. In years four and five, the Red Monkey will have no depreciation for tax purposes but will still be depreciating the renovations on its books, and in those years its deferred tax liabilities will become due. Deferred tax liabilities are generally deferred indefinitely only if a company invests consistently. Patel’s statement is incorrect.

In order to calculate the total deferred tax liability for year three, we can calculate the deferred tax charge in years one, two, and three and then add them.

Pre-tax income for the Red Monkey for reporting purposes every year equals ($14,384,000 revenue ? $5,070,400 straight-line depreciation) = $9,313,600.

For tax purposes, pre-tax income in years one and two equals $14,384,000 revenue – ($25,352,000 × 0.35) = $8,873,200 depreciation, or $5,510,800 in net income per year. Thus the deferred tax charge in years one and two equals the difference in income of ($9,313,600 reported income ? $5,510,800 taxable income) = $3,802,800 at a 41% tax rate, or ($3,802,800 × 0.41) = $1,559,148.

For tax purposes, pre-tax income in year three equals $14,384,000 revenue – ($25,352,000 × 0.30) = $7,605,600 depreciation, or $6,778,400 in net income. Thus the deferred tax charge for year three equals the difference in income of ($9,314,000 reported income ? $6,778,400 taxable income) = $2,535,600 at a 41% tax rate, or ($2,535,600 × 0.41) = $1,039,596.

Thus the total deferred tax liability at the end of year 3 equals ($1.559 million + $1.559 million + $1.040 million) = $4.158 million. Shah’s statement is correct.

Alternately, we could do this more quickly by recognizing that, in year three, the renovations will be completely depreciated for tax purposes, so that taxable depreciation will have reached their full cost, $25,352,000. We also can calculate that, because the renovations are being depreciated on a straight-line basis over five years, by year three Red Monkey will have depreciated (3 years charged / 5-year asset life) = 60% of their total cost on its books. Thus, the deferred tax liability in year three will be based on the [($25,352,000)× (1 – 0.60)] = $10.141 million in cost not yet depreciated. At a 41% tax rate, the deferred taxes on the cost not yet depreciated will equal ($10.141 million × 0.41) = $4.158 million.

Note that calculating a deferred tax liability directly is often much faster than doing it year by year.

Using the information we calculated in question 4, we can recalculate the deferred tax liability for years one, two, and three using the lower tax rate:

Deferred tax liability for years one and two equals [($9.314 ? $5.511) × 0.31] = $1.179 million. Deferred tax liability for year three equals ($9.314 ? $6.778) × 0.31 = $0.786 million. Thus the deferred tax liability on Red Monkey’s balance sheet at the end of year three, after the change in tax rate, will be ($1.179 million + $1.179 million + $0.786 million) = $3.144 million. Alternately, we can calculate the deferred tax liability for year three directly as ($10.141 million × 0.31) = $3.144 million. Using either approach, Patel’s statement is incorrect.

We calculated in question 4 that the deferred tax liability in year three will equal $4.158 million. Thus, Red Monkey’s deferred tax liability will decrease by ($4.158 ? $3.144) = $1.014 million due to the new lower tax rate. Thus, Red Monkey will have to make an adjustment of $1.014 million in tax expense in year three, which will result in an increase in net income of $1.014 million. Jayagopal’s statement is correct.

Potential reasons for a difference between a firm’s statutory and effective tax rates include tax credits, differential tax treatment between capital gains and operating income, and deferred tax provisions on reinvested earnings of unconsolidated domestic affiliates. The difference in depreciation schedules for tax and reporting purposes affects the level of deferred taxes but not the tax rate at which they are calculated.

Some jurisdictions allow companies to use different inventory cost-flow methods for financial statement purposes and for tax purposes. Where this is permissible (which is determined by each country’s tax laws, not by the accounting standard-setting bodies), temporary differences will arise.

LIFO (tax): when prices are declining, the most recent (lower) prices are included in COGS. This results in a higher inventory value, and hence a higher tax base, compared to FIFO.

FIFO (financial statements): when prices are declining, the oldest (higher) prices are included in COGS. This results in a lower inventory value, and hence a lower carrying value for financial statement purposes, compared to LIFO.

Therefore, there is a deductible temporary difference since the higher tax base results in an excess of taxes payable over income tax expense. This gives rise to a deferred tax asset.