Exam 2: Asset and Liability Valuation and Income Measurement

The financial statement disclosures for Able Company,a retail chain,revealed the following information regarding the firm's income taxes: Required:a.Assuming that Able had no significant permanent differences between book income and taxable income,did income before taxes for financial reporting exceed or fall short of taxable income for 2010? Explain. b.Did income before taxes for financial reporting exceed or fall short of taxable income for 2011? Explain. c.Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2010? For 2011? d.Able does not contract with an insurance agency for property and liability insurance; instead,it self-insures.Able recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses.When it experiences an actual loss,it charges that loss against the liability.The income tax law permits self-insured firms to deduct such losses only in the year sustained. Why are deferred taxes related to self-insurance disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. e.Able treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in inventory for tax reporting.Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. f.Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services,but claim an income tax deduction only when they make cash payments under the benefit plan.Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between 2009 and 2011. g.Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues,but claim an income tax deduction when they deem a particular customer's accounts uncollectible.Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. h.Able uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes.Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2009 and 2011.

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