19 Accounting for Income Taxes Financial Reporting Problem 19
Financial Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) What amounts relative to income taxes does P&G report in its:
(1) 2014 income statement?
(2) June 30, 2014, balance sheet?
(3) 2014 statement of cash flows?
(b) P&G’s income taxes in 2012, 2013, and 2014 were computed at what effective tax rates? (See the notes to the financial statements.)
(c) How much of P&G’s 2014 total income taxes was current tax expense, and how much was deferred tax expense?
(d) What did P&G report as the significant components (the details) of its June 30, 2014, deferred tax assets and liabilities?
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) What are the amounts of Coca-Cola’s and PepsiCo’s provision for income taxes for the year 2014? Of each company’s 2014 provision for income taxes, what portion is current expense and what portion is deferred expense?
(b) What amount of cash was paid in 2014 for income taxes by Coca-Cola and by PepsiCo?
(c) What was the U.S. federal statutory tax rate in 2014? What was the effective tax rate in 2014 for Coca-Cola and PepsiCo?
Why might their effective tax rates differ?
(d) For year-end 2014, what amounts were reported by Coca-Cola and PepsiCo as (1) gross deferred tax assets and (2) gross deferred tax liabilities?
(e) Do either Coca-Cola or PepsiCo disclose any net operating loss carrybacks and/or carryforwards at year-end 2014?
What are the amounts, and when do the carryforwards expire?
Financial Statement Analysis Case
Homestake Mining Company
Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars)…
Instructions
(a) What is the significance of Homestake’s disclosure of “Current taxes” of $26,349 and “Deferred taxes” of $(39,436)?
(b) Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).
(c) Homestake reported tax loss carryforwards of $71,151 and tax credit carryforwards of $12,007. How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?
Bridge to the Profession 1109
Accounting, Analysis, and Principles
DeJohn Company, which began operations at the beginning of 2015, produces various products on a contract basis. Each contract generates a gross profit of $80,000. Some of DeJohn’s contracts provide for the customer to pay on an installment basis. Under these contracts, DeJohn collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes gross profit in the year of completion (accrual basis). For tax purposes, DeJohn recognizes gross profit in the year cash is collected (installment basis).
Presented below is information related to DeJohn’s operations for 2017:
1. In 2017, the company completed seven contracts that allow for the customer to pay on an installment basis. DeJohn recognized the related gross profit of $560,000 for financial reporting purposes. It reported only $112,000 of gross profit on installment sales on the 2017 tax return. The company expects future collections on the related installment receivables to result in taxable amounts of $112,000 in each of the next four years.
2. In 2017, nontaxable municipal bond interest revenue was $28,000.
3. During 2017, nondeductible fines and penalties of $26,000 were paid.
4. Pretax financial income for 2017 amounts to $500,000.
5. Tax rates (enacted before the end of 2017) are 50% for 2017 and 40% for 2018 and later.
6. The accounting period is the calendar year.
7. The company is expected to have taxable income in all future years.
8. The company has no deferred tax assets or liabilities at the end of 2016.
Accounting
Prepare the journal entry to record income taxes for 2017.
Analysis
Classify deferred income taxes on the balance sheet at December 31, 2017, and indicate, starting with Income before income taxes, how income taxes are reported on the income statement. What is DeJohn’s effective tax rate?
Principles
Explain how the conceptual framework is used as a basis for determining the proper accounting for deferred income taxes.
