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Homework answers / question archive / E10-38
E10-38. Analyzing and Interpreting Income Tax Disclosures Colgate-Palmolive reports the following income tax footnote disclosure in its 10-K report. 2015 2014 Deferred Tax Balances at December 31 ($ millions) Deferred tax liabilities Goodwill and intangible assets. Property, plant and equipment. Other.. $ (458) (380) (150) (988) $ (497) (380) (266) (1,143) continued continued from prior page Deferred Tax Balances at December 31 ($ millions) 2015 2014 Deferred tax assets Pension and other retiree benefits Tax loss and tax credit carryforwards. Accrued liabilities. Stock-based compensation Other. 541 30 235 123 151 638 33 276 119 148 1,080 1,214 Net deferred income taxes $ 92 $ 71 a. Colgate reports $380 million of deferred tax liabilities in 2015 relating to “Property.” Explain how such liabilities arise. b. Describe how a deferred tax asset can arise from pension and other retiree benefits. c. Colgate reports $30 million in deferred tax assets for 2015 relating to tax loss and tax credit carryfor- wards. Describe how tax loss carryforwards arise and under what conditions the resulting deferred tax assets will be realized. d. Colgate's income statement reports income tax expense of $1,215 million. Assume that cash paid for income tax is $1,259 million and that taxes payable decreased by $23 million. Use the financial state- ment effects template to record tax expense for 2015. (Hint: Show the effects of changes in deferred taxes.)
| a) Deferred Tax Liability of $ 380 millions can be arises due to difference in depreciation amount as per | ||||||||||
| accounting and tax reporting. Normally it seen depreciation in accounting charged as per accounting | ||||||||||
| method and depreciation deduction allowed under income tax with different scheme. If depreciation | ||||||||||
| as per tax is higher than accounting depreciation, then there is creation of Deferred Tax Liability. | ||||||||||
| b) Deferred Tax Assets with respect to pension and other retiree benefits can be arise if employees | ||||||||||
| benefits expenses and provision of retirement benefits expenses is higher in books of accounts and | ||||||||||
| the same expenses are not deductible as expenses under income tax law untill it's not paid. | ||||||||||
| c) Colgate - Palmolive has suffered a loss in a financial year, so the company is entitled to set off (use) | ||||||||||
| it's future income against this loss. So this loss is an assets and in taxation term it called as deferred tax | ||||||||||
| assets. So company will realise deferred tax assets for $ 30 millions by offsetting the future income against | ||||||||||
| this assets. | ||||||||||
| $ | ||||||||||
| d) Income Tax Expenses for 2015 | 1,215 | |||||||||
| Deferred tax Assets (net of DTL) arises during 2015: | 92 | |||||||||
| Current Tax Expenses (Tax Payable) | 1,307 | |||||||||
| Opening Tax Payable | 1,310 | |||||||||
| current tax expenses | 1,307 | |||||||||
| Tax paid (cash) | -1,259 | |||||||||
| Tax credit (Assumed) | -25 | |||||||||
| Closing Tax Payable | 1,333 | |||||||||
| Condition to justified: | ||||||||||
| Tax payable decreased by $ 23 millions | -23 | - |
