Friday, June 3, 2016

Accounting [Taxes & SHE] - Federated, IBM & Coke case solution

Federated, IBM & Coke

Q1.
How much in tax expense did Federated recognize in fiscal 2003?

391. See the income statement and the first panel of note 11.

Q2.
How much of the tax expense recognized in Question 1 represented a change in
deferred tax liability?

$60 million (Note 11 – 1st table)

This represents the net change – we cannot identify the asset, liability split from this note – for example the debit may be a reversal not the recognition of an asset. The notion here is we know the tax expense – see above – what is the split between tax payable and DIT?

You may note that the change in DIT net is 10 – for your reference this does not match the 60 above because of items which affect taxes but which are not in the income statement before the tax expense or on the income statement at all (i.e. Other Comprehensive Income).

Q3.
In fiscal 2003, Federated had the following sentence in its tax footnote:
"For 2003, income tax expense was reduced by $38 million due to a change in
estimate of the effective tax rate at which existing deferred tax assets and
liabilities will ultimately be settled."
What would Federated's 2003 credit to net deferred tax liability have been
without this transaction?

$98 million (60 from Q2 plus the 38 in the note)

Q4.
What are income taxes payable recorded at on the Balance Sheet as of the end of
fiscal 2003?

362.     See the balance sheet.





Q5.
Does the origination (i.e., recognition of a credit to) of a Net Deferred Tax
Liability cause income tax expense to be greater or less than the amount
currently payable?

Greater

The credit to net deferred tax liability means that tax expense must be
greater than the tax payable amount i.e. Dr Tax Expense, Cr DIT, Cr Tax pay.

Q6.
The difference between the tax and financial net book values of Accounts
Receivables, net arises because of the difference between when Financial
Accounting and Tax Accounting recognize bad debt expense.
What is the tax basis (net book value for tax purposes) of the allowance for
doubtful accounts as of the end of fiscal 2003?

-0-. There is no allowance for doubtful accounts for tax purposes. The direct write-off method applies – you can only deduct when you write off accounts.

Q7.
As noted in the previous question, the difference between the tax and financial
net book values of Accounts Receivables, net arises because of the difference
between when Financial Accounting and Tax Accounting recognize bad debt expense.
How much greater (indicate with a positive number) or less (indicate with a
negative number) was bad debt expense taken for financial reporting purposes
than that taken for tax reporting purposes for fiscal 2003?

8, Bad debt expense was 45 and write offs were 37. See note 5.

An alternative approach is to notice that the Deferred Tax Asset
associated with the Allowance increased by 3 to 15.

The implied tax rate therefore must be (DTA/Allowance Balance) = 15/42 = .357.
The temporary difference for the year must be 3/.357 = 8.4.

Q8.
What was Federated's US federal statutory tax rate in fiscal 2003?

35%. See just above the third panel of note 11.

Q9.
What was Federated's US federal effective tax rate in fiscal 2003?

367/1084 = 33.9% See Note 11 for the Federal Tax Expense
Note the 367 is the total FEDERAL tax expense shown in the first panel of Note 11.
Q10.
If Federated had $100,000 in tax exempt municipal bond interest income in
addition to its reported fiscal 2003 income, how would this have affected the
deferred portion of its total tax expense?

No effect
Tax exempt municipal interest represents a permanent difference not a
temporary difference.

Q11.
If Federated had $100,000 in tax exempt municipal bond interest income in
addition to its reported fiscal 2003 income, how would this have affected its
total tax expense?

No effect
Tax exempt municipal interest does not give rise to tax expense.

Q12.
If Federated had $100,000 in tax exempt municipal bond interest income in
addition to its reported fiscal 2003 income, how would this have affected its
effective tax rate?

Decrease

Since the interest would have increased pre-tax financial income but not
tax expense, the effective tax rate would have decreased.

Q13.
In fiscal 2003, what average tax rate is Federated using to record its deferred
taxes on NOLs (net operating loss carryforward)?

34.9% = LCF DIT Asset/NOL = 137/392

Note the 392 is disclosed in text, below the DIT break out in Note 11.

Q14.
For this question only, suppose that Federated had booked its fiscal 2002 (i.e.,
fiscal year ended Feb. 1, 2003) deferred taxes on NOLs using a rate of 35.2%. By
how much did NOLs decline in fiscal 2003?

11.4 = (ending NOL – beginning NOL) = 392 – (142/.352)

Note: The 392 is as in Q13, DIT Asset NOL was 142 last year (Note 11)



Q15.
When applicable, assume that deferred taxes are generated at a 36% rate.
The difference between the tax and financial net book values of Property and
Equipment arises because of the difference between the depreciation method used
for financial reporting purposes and tax reporting purposes.
What is the tax basis (net book value for tax purposes) of Properties as of the
end of fiscal 2003? Include the Leased Properties under Capitalized Leases.

2691

= financial net book value – difference between book and tax net book
Value ( i.e. temporary difference)

Note: The DIT Liability is the temporary diff x Tax Rate, so if we know the DIT and the tax rate we can solve for the temporary difference.

= 6174 – (1254/.36) 
(6174 NBV on B/S, 1254 DTL P&E See Note 11)
We know Book is greater than tax since there are DIT Liabilities

Q16.
When applicable, assume that deferred taxes are generated at a 36% rate.
As noted above, the difference between the tax and financial net book values of
Property and Equipment arises because of the difference between the depreciation
method used for financial reporting purposes and tax reporting purposes.
By what amount was depreciation taken for financial reporting purposes greater
(indicate with a positive number) or less (indicate with a negative number) than
depreciation taken for tax purposes in fiscal 2003?

155.55
 = (1310 – 1254)/.36 
(See Note 11 for DIT Liab of 1254 for this year and 1310 for last year)
The DIT liability decreased so we know Accounting depreciation was greater.











IBM Questions

Q17.
How many shares of common stock were authorized at fiscal year-end 2001?

4,687,500,000             See the balance sheet.

Q18.
How many shares of common stock were issued as of fiscal year-end 2001?

1,913,513,218            See the balance sheet.

Q19.
IBM also has repurchased some of its own shares of stock that had been
previously issued. Once these shares are repurchased they are called Treasury
Stock. How many shares did IBM hold in treasury at the end of 2001?

190,319,489                See the balance sheet.

Q20.
How many shares were outstanding at fiscal year-end 2001?

1,723,193,729             answer to #18 less answer to #19.

Q21.
What is the par value of EACH share of common stock issued?

20 cents.          See the balance sheet.

Q22.
What was the total par value of ALL shares issued as of fiscal year-end 2001?

.20 x answer to #18 = 382,702,643.6 ~ 383 million

Q23.
How much money in excess of the par value of the stock had been contributed by
shareholders?

14,248 less answer to #22 = 13,865 (14,248 is B/S amount for common stock)

Q24.
How much did IBM pay for Treasury Stock it held at fiscal year-end 2001?

20,114             see the balance sheet or SSE.


Q25.
How much did IBM pay for Other Treasury Stock Not Retired in fiscal 2001?

5091 See SSE

Q26.
How much in common and preferred dividends did IBM declare in fiscal 2001?

956 + 10 = 966 See SSE

Q27.
During fiscal 2001, did IBM's shareholders' equity increase or decrease as a
result of items that were reported in "Comprehensive Income" but were not
included in net income?

Decrease (367)

[Ending net loss 662 versus beginning net loss of 295 in AOCI]

Which IBM calls “Accumulated Gains and Losses not affecting Retained Earnings”

See SSE

Q28
How much in common and preferred dividends did IBM pay in fiscal 2001?

966 See SCF



















The remaining questions refer to the exerpts from Coca Cola's 2006 Annual Report.
Fiscal 2006 refers to the year ending December 31, 2006.

Q29.
What amount of stock-based compensation expense did Coca Cola recognize in
fiscal 2006?

324

See SSHE under Capital Surplus
See SCF as a CFO adjusting item
 and note 15 – second paragraph, first sentence

Q30.
What was the account credited when the above journal entry dealing with the Coca
Cola's stock based compensation expense was recorded? Please use the name
indicated in the financial statements.

Capital Surplus. See SSE.

Q31.
Ignoring taxes, what effect did the fiscal 2006 stock based compensation expense
have on Coca Cola's cash flow in 2006?

-0- It’s a non-cash expense. See SCF – it reduces NI but has no effect on CFO, thus is added back on the indirect cash flow statement.

Q32.
As of the end of fiscal 2006, how much in stock based compensation expense does
Coca Cola expect to recognize in 2007 and beyond for nonvested share-based
compensation arrangments granted in fiscal 2006 and earlier?


376 See Note 15, 4th sentence of 2nd paragraph.

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