Question 1 Accounting for Taxes

Provided below is selected data from Amazons footnotes for fiscal year 2010. For all your questions, refer only to the information provided in the problem set, and assume a tax rate of 35%.

1. Using the BSE, record the entry for the tax provision for 2010, indicating clearly any deferred taxes and the taxes payable.

2. How much tax did Amazon pay in cash in 2010?

For the remaining questions, assume that Revenue items in Deferred tax assets in Amazons footnotes ($23 million in 2010) all are the result of unearned revenue from the cash sales of Amazon Prime.

3. For tax purposes, Amazon recognizes revenue on the cash sale of Amazon Prrime. At the end of the fiscal year, Amazon recognizes a deferred tax asset under Revenue items.

1. Explain how the deferred tax asset arises.

2. Can companies have deferred tax liabilities arising from unearned revenue? Explain.

4. During the fiscal year 2010, did Amazon recognize more revenue from Amazon Prrime in the financial statements or in the tax statements? Yes or No, and why?

Excerpts from footnotes

The components of the provision for income taxes, net are as follows Year Ended December 31. 2010 5311 37 348 $119 23 172 5227 25 252 Current taxes U.S. and state International Current taxes Deferred taxes U.S. and state International Deferred taxes Provision for income taxes.net 1 3 81 $253 (5) S247 S352 Deferred income tax assets and liabilities are as follows: December 31. 2010 2009 S 4 S 120 82 50 23 Deferred tax assets: Net operating losses-stock-based compensation (1) Net operating losses-ther.... Net operating losses obtained through acquisitions (2) Stock-based compensation Assets held for investment Revenue items Expense items Other items Net tax credits (3) Total gross deferred tax assets Less valuation allowance (4) Deferred tax assets, net of valuation allowance Deferred tax liabilities: Basis difference in intangible assets Expense items. Deferred tax assets, net of valuation allowance and deferred tax liabilities 101 125 58 254 172 75 42 14 621 698 (146) (173) 475 $25 (209) (218) (226) (168) $ 40 $ 139 Unearned Revenue Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Current unearned revenue is included in "Accrued expenses and other" and non-current unearned revenue is included in "Long-term liabilities" on our consolidated balance sheets. Current unearned revenue was $461 million and $511 million at December 31, 2010 and 2009. Non-current unearned revenue was $34 million and $201 million at December 31, 2010 and 2009. Income Taxes Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the US were $1.6 billion at December 31, 2010. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income and capital gains by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis. We utilize a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our tax contingencies in income tax expense. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes. Amounts received in advance for subscription services, including amounts received for Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term. The components of the provision for income taxes, net are as follows Year Ended December 31. 2010 5311 37 348 $119 23 172 5227 25 252 Current taxes U.S. and state International Current taxes Deferred taxes U.S. and state International Deferred taxes Provision for income taxes.net 1 3 81 $253 (5) S247 S352 Deferred income tax assets and liabilities are as follows: December 31. 2010 2009 S 4 S 120 82 50 23 Deferred tax assets: Net operating losses-stock-based compensation (1) Net operating losses-ther.... Net operating losses obtained through acquisitions (2) Stock-based compensation Assets held for investment Revenue items Expense items Other items Net tax credits (3) Total gross deferred tax assets Less valuation allowance (4) Deferred tax assets, net of valuation allowance Deferred tax liabilities: Basis difference in intangible assets Expense items. Deferred tax assets, net of valuation allowance and deferred tax liabilities 101 125 58 254 172 75 42 14 621 698 (146) (173) 475 $25 (209) (218) (226) (168) $ 40 $ 139 Unearned Revenue Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Current unearned revenue is included in "Accrued expenses and other" and non-current unearned revenue is included in "Long-term liabilities" on our consolidated balance sheets. Current unearned revenue was $461 million and $511 million at December 31, 2010 and 2009. Non-current unearned revenue was $34 million and $201 million at December 31, 2010 and 2009. Income Taxes Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the US were $1.6 billion at December 31, 2010. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income and capital gains by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis. We utilize a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our tax contingencies in income tax expense. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes. Amounts received in advance for subscription services, including amounts received for Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term