Interpreting income tax disclosures. Deere & Company manufactures agricultural and industrial equipment, which it sells through independent distributors. Deere rec- ognizes revenue for financial reporting at the time it ships equipment to its indepen- dent distributors. It recognizes revenue for tax purposes using the installment method. Distributors have no rights to return unsold equipment. unless it is faulty. Deere rebates a portion of the selling price to distributors if they sell a certain vol- ume of products each year. Deere also provides financing services to retail customers for Deere products sold by its independent distributors.

The income tax note for Deere for Year 10 and Year 11 appears in Exhibit 10.7 (amounts in millions).

a. Give the journal entry to record income tax expense for Year 10.

b. Was book income before income taxes larger or smaller than taxable income for Year 10? Explain.

c. Give the journal entry to record income tax expense for Year 11.

d. Was book income before income taxes larger or smaller than taxable income for Year 11? Explain.

e. What is the likely reason for the direction of change in the deferred asset relating to installment sales between Year 10 and Year 11?

f. Assume that the income tax rate applicable to Year 11 and future years did not change during Year 11. Depreciation expense for book purposes was $209 million during Year 11. Compute the amount of depreciation expense Deere recognized for tax purposes for Year 11. g. What is the likely reason that the goodwill amortization item in the income tax reconciliation carries a positive sign?

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DEERE & COMPANY EXHIBIT 10.7 Income Tax Disclosures (Problem 44) Income before Income Taxes Income Tax Expense Current Deferred Total Income Taxes on income before Income Taxes at the Statutory Tax Rate of 35% Tax Exempt Interest Goodwill Amortization Income Tax Expense (credit) COMPONENTS OF DEFERRED TAXES Deferred Tax Assets Uncollectible Accounts Sales Rebates and Allowances Pensions... Valuation Allowance Net Deferred Tax Assets Deferred Tax Liabilities Installment Sales Receivable Depreciable Assets Deferred Tax Liability Year 10 Year 11 $588 $ (26) $124 58 $182 $ 95 (100) $ (5) $206 $ (9) (30) (3) 6 7 $182 $ (5) September 30 Year 9 Year 10 Year 11 $ 36 $ 44 $ 70 22 37 58 41 35 44 (22) (34) (23) $ 77 $ 82 $149 $126 $167 $127 186 208 215 $312 $375 $342