Wen Chu is a senior account manager for a large Canadian bank. The bank is considering the possibility of syndicating a large debenture issue for Wilstar Products Ltd. (WPL), a manufacturer of auto parts. Wen has been given the task of analyzing WPL’s financial performance. When the bank’s account managers or analysts are reviewing any client’s financial statements, the bank’s policy is to remove the effects of income tax allocation in order to enhance the usefulness of the statements for analytical procedures such as evaluating return on investment, earnings, and debt/equity ratios. That is, all deferred tax amounts are eliminated.

Wen has assigned you, analyst, the task of evaluating WPL’s financial statements both with and without the effect of deferred tax (DT). Wen also would like your comments on the likelihood of Wilstar’s accumulated DT being reversed in the foreseeable future.
Condensed versions of Wilstar’s SCI, SFP, and SCF are presented in Exhibits 1 to 3. Exhibit 4 shows an excerpt from Note 9 to the financial statements, on Income Taxes.

Required:
Prepare a memo to Wen Chu.

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EXHIBIT 1 Revenue Expenses Manufacturing costs Operating, selling and general Depreciation and amortization Other expenses Earnings before income tax Provision for income tax Current Deferred WILSTAR PRODUCTS LIMITED Statement of Comprehensive Income (condensed) (in millions of dollars) Net earnings and comprehensive income 31 December 20X2 $24,088 9,140 4,897 904 4,690 19,631 4,457 23 1,060 1,083 $ 3,374 31 December 20X1 $ 20,129 8,184 4,417 668 4,108 17,377 2,752 55 855 910 $1,842