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C13-2 page 789 Alphabet Inc.: Analyzing tax notes (LO 13-2 LO 13-4, LO 13-8 ) Edited excerpts from Alphabet Inc.'s (parent of Google) 2015 tax note follow Year Ended December 31, 2014 S5,567 6,04 6,878 ($ in millions) Expected provision at federal statutory rate (35%) State taxes, net of federal benefit Change in valuation allowance Foreign rate differential Federal research credit Basis difference in investment of Arris Other adjustments Provision for income taxes 2013 2015 133 (641) 132 (291) (65) (164) (2,482) (2,109) 2,624) (318) (433) 644 (49) (407) 0 (188) 57 $2,739$3,639 3,303 Current: $2,394 2,716 S 3,235 Federal State Foreign Total 127 157 774 3,647 (397) 723 3,561 3,232 Deferred: Federal (421) 29 (198) (43) (17) (258) S 2,739 3,639 3,303 State Foreign (72) (43) Total (493) Provision for income taxes As of December 31, Deferred tax assets: 2014 2015 Stock-based compensation expense $ 376 534 State taxes 133 Investment loss Legal settlement accruals Accrued employee benefits Accruals and reserves not currently deductible Net operating losses Tax credits Basis difference in investment of Arris Prepaid cost sharing Other 144 101 832 245 230 503 1,357 3,468 337 7,870 1,659) (1,732) 6,138 175 671 175 207 262 1,347 243 3,722 Total deferred tax assets Valuation allowance Total deferred tax assets net of valuation allowance 2.063 6. Delerred tax liabililies Depreciation and amortization Identified intangibles Mark-to-market investments Renewable energy investments Foreign earnings Other Total deferred tax liabilities (852) (,126) (787) (93) (529) 0 (3,468) (73) (2,645) (6,076) (S 582) 62 (965) (273) (430) (125) Net deferred tax liabilities Required 1. Prepare the book journal entry for income tax expense for 2015 (combine U.S., foreign, and state income taxes). Clearly indicate both the account title and whether the account is being debited or credited 2. Using information given in the tax rate reconciliation, estimate Alphabet's pre-tax book income for 2015 3. What was Alphabet's 2015 effective tax rate? 4. Using information found in the tax note, determine whether depreciation and amortization expense was higher for book or tax page 790 purposes in 2015 and by how much 5. Based on information in the tax note, are the tax rates in foreign countries in which Alphabet operates greater than or less than the U.S. tax rate? 6. Explain why federal research credits appear in the tax rate reconciliation
