Interpreting income tax disclosures. Refer to the income tax note for General Products Company in Exhibit 10.5 in this chapter. The income tax rate applicable to Year 1 through Year 4 and future years did not change.

a. Was book income before income taxes larger or smaller than taxable income during Year 3? Explain.

b. Was book income before income taxes larger or smaller than taxable income during Year 4? Explain.

c. What is the likely interpretation of the increasing deferred tax asset for both uncollectible accounts receivable and warranty liability?

d. By how much did depreciation claimed on the tax return for Year 4 exceed book depreciation?

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EXHIBIT 10.10 SUN MICROSYSTEMS Income Tax Disclosures (all dollar amounts in millions) [Problem 46] INCOME (LOSS) BEFORE TAXES Domestic International TAXES ON INCOME Current-Federal Foreign State and Local Deferred-Federal Foreign State and Local EFFECTIVE TAX RATE Federal Tax Rate State and Local Taxes Nontaxable Interest Revenue Foreign Tax Rates Other Year 5 Year 6 Year 7 @h S " $130 94 $ 49 235 $284 $224 Year 5 Year 6 $ 38 $ 28 38 60 6 4 (14) 3 (4) $ 67 $ 88 $167 35% 35% 2 (3) (4) 30% 31% December 31 Year 4 Year 5 Year 6 Year 7 COMPONENTS OF DEFERRED TAXES Deferred Tax Assets Pension $ 68 $ 73 $ 85 $101 Inventories 74 77 89 Deferred Tax Asscts $142 $150 $174 94 $195 Deferred Tax Liabilities Depreciation $ 14 $ 7 $ 27 $ 25 Deferred Tax Liabilities....... $ 14 $ 7 $ 27 $ 25