Interpreting the Income Tax Expense Footnote The income tax footnote to the fina
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Interpreting the Income Tax Expense Footnote
The income tax footnote to the financial statements of FedEx Corporation follows.
The components of the provision for income taxes for the years ended May 31 were as follows:
(a)What is the amount of income tax expense reported in FedEx's 2007, 2006, and 2005 income statements?
2007 Income Tax Expense = $Answer million
2006 Income Tax Expense = $Answer million
2005 Income Tax Expense = $Answer million
(b) What percentage of total tax expense is currently payable in each year?
Round your answers to the nearest percent.
2007Answer%
2006Answer%
2005Answer%
Which of the following statements best describes why the percentages of total tax expense are different each year?
Differences in the percentage of income tax expense that is currently payable arise because tax laws change frequently.
Differences in the percentage of income tax expense that is currently payable arise solely because of fluctuations in the amount of taxable income.
Differences in the percentage of income tax expense that is currently payable arise because companies typically defer tax payments in periods of reduced cash flow.
Differences in the percentage of income tax expense that is currently payable arise because of fluctuation in the amount of deferred income tax assets or liabilities.
(c) Which of the following provides the best example that can give rise to an increase in the deferred tax liability?
Deferred tax liabilities arise in periods of higher taxable income.
Companies use an accelerated depreciation method for tax purposes that results in a lower taxable income in the earlier years of the assets life vis-à-vis net income on the financial accounting books, which reflect straight-line depreciation for GAAP purposes.
Deferred tax liabilities generally arise because companies defer the payment of taxes in periods of low cash flow.
Restructuring accruals provide the best example of an event that gives rise to an increase in deferred tax liabilities.
($ millions) 2007 2006 2005 Current provision Domestic Federal $ 829 $ 719 $ 634 State and local 72 79 65 Foreign 174 132 103 1,075 930 802 Deferred provisions (benefit) Domestic Federal 90 151 67 State and local 27 13 (4) Foreign 7 (1) (1) 124 163 62 Provision for income taxes $ 1,199 $ 1,093 $ 864Explanation / Answer
a) Formula: Tax expense = Sum of current tax provisions + Change in deffered provisions
For 2007, Change in deferred provisions = 163-124=39
Tax Expense = 1075 + 39 = $1114 million
For 2006, Change in deferred provisions = 62-163 = -101
Tax Expense = 930 - 101 = $829 million
For 2005, Change in deferred provisions = -62 (Assuming no deferrred provisions in 2004)
Tax Expense = 802-62 = $740 million
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b)Formula: Total expense payable each year = Net current provisions * 100/ Total Provisions for income tax
For 2007, Total expence = 1114 * 100 / 1199 = 92.91% = 93%(By rounding off)
For 2006, Total expence = 829 * 100 / 1093 = 75.84% = 76%(By rounding off)
For 2005, Total expence = 740 * 100 / 864 = 85.64% = 86%(By rounding off)
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Differences in the percentage of income tax expense that is currently payable arise because of fluctuation in the amount of deferred income tax assets or liabilities.
Explanation: Deferred tax assets means taxes which are overpaid or paid in advance and deferred tax liability taxes which are taxes which are to be paid. The changes in these cause the differences in the percentage of income tax.
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Companies use an accelerated depreciation method for tax purposes that results in a lower taxable income in the earlier years of the assets life vis-à-vis net income on the financial accounting books, which reflect straight-line depreciation for GAAP purposes.
Explanation: Accelerated depreciation method and straight-line depreciation method are two methods of depreciation. In the former one the amount of depreciation is higher in earlier years and then it decreases gradually, while in latter one the depreciation is spread equally over the period of time. This creates increased deferred tax liability.
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