interpreting Income Tax Disclosures. Disclosures related to income taxes for The Coco-Cola company (Coca-Cola) for 20062008 appear in Exhibit 9.9.

REQUIRED

a. Why are Coca-Colas average tax rates so low?

b. Is it likely that Coca-Cola has recognized a net asset or a net liability on its balance sheet for pension and other postretirement benefit plans? Explain your reasoning.

c. Coca-Cola discloses that the valuation allowance on deferred tax assets relates primarily to net operating loss carryforwards. Assume for purposes of this question that Coca-Cola had recognized a valuation allowance each year exactly equal to the deferred tax assets recognized for net operating loss carryforwards. Indicate the effect on income tax expense and income tax payable In the year Coca-Cola initially recognizes the net operating loss carryforwards.

d. Refer to Requirement c. Indicate the effect on income tax expense and income tax payable in the year Coca-Cola benefits from the net operating loss carryforwards.

e. Interpret Coca-Colas recognition of net deferred tax liabilities, instead of deferred tax assets, for equity investments in 2008.

Exhibit 9.9

The Coca-Cola Company

Income Tax Reconciliation and Components o Deferred Taxes

(amounts in millions)

(problem 9.25)

f. Why does Coca-Cola report tax effects of equity income and investments in the income tax reconciliation and in deferred tax liabilities?

g. Interpret Coca-Colas recognition of deferred tax liabilities, instead of deferred tax assets for intangible assets.

\begin{tabular}{|c|c|c|c|} \hline & 2008 & 2007 & 2006 \\ \hline \multicolumn{4}{|l|}{ Income Tax Reconciliation } \\ \hline U.S. Statutory Tax Rate & 35.0% & 35.0% & 35.0% \\ \hline State Taxes, Net of Federal Tax Benefit & 0.8 & 0.6 & 0.7 \\ \hline Foreign Earnings Taxes at Lower Rates & (14.3) & (10.8) & (11.4) \\ \hline Equity Income or Loss & 0.2 & (1.3) & (0.6) \\ \hline Other Operating Charges & 0.7 & 0.5 & 0.6 \\ \hline Other & (0.5) & (0.0) & (1.5) \\ \hline Average Tax Rate & 21.9% & 24.0% & 22.8% \\ \hline Components of Deferred Taxes on December 31: & 2008 & 2007 & \\ \hline \multicolumn{4}{|l|}{ Deferred Tax Assets } \\ \hline Property, Plant and Equipment & $33 & $45 & \\ \hline Trademarks and Other Intangible Assets & 79 & 76 & \\ \hline Equity Method Investments & 339 & 238 & \\ \hline Other Liabilities & 447 & 845 & \\ \hline Benefit Plans & 1,171 & 881 & \\ \hline Net Operating Loss Carryforwards & 494 & 554 & \\ \hline Other & 532 & 266 & \\ \hline Total Deferred Tax Assets (Gross) & $3,095 & $2,905 & \\ \hline Valuation Allowance & (569) & (611) & \\ \hline Total Deferred Tax Assets (Net) & $2,526 & $2,294 & \\ \hline \multicolumn{4}{|l|}{ Deferred Tax Liabilities } \\ \hline Property, Plant and Equipment & $(667) & $(670) & \\ \hline Trademarks and Other Intangible Assets & (1,974) & (1,925) & \\ \hline Equity Method Investments & (267) & (841) & \\ \hline Other Liabilities & (101) & (90) & \\ \hline Other & (229) & (383) & \\ \hline Total Deferred Tax Liabilities & $(3,238) & $(3,909) & \\ \hline Net Deferred Tax Assets (Liability) & $(712) & $(1,615) & \\ \hline \end{tabular}