Requirement 2 Note that Acme's tax rate reconciliation begins with 34% instead of 35%. We will discuss in class why this is the case. In preparing the case, take as given that 34% is the appropriate starting point for the reconciliation. a) The $46,160 shown for state and local taxes in the tax rate reconciliation differs from the $69,939 (consisting of $88,741 current and $18,802 deferred) reported for state (which also includes local) taxes in the tax provision summary. Why? b) Explain why none of the items giving rise to deferred tax assets and liabilities are shown in the tax rate reconciliation, except for the change in the valuation allowance. c) What does the summary of deferred tax items imply about the likelihood that Acme's NOL carryforward will be realized (i.e. used)? 7. Income Taxes The amounts of income tax expense (benefit) reflected in operations follow Exhibit 4 2011 2010 Current: 756,126 Federal State Foreign 103,040 11,312 88,741 532.827 1.377,694 594,110 708.462 Deferred: Federal State Foreign (142,281) (18.802) (1.784) (162.867) 1,214,827 (8,160) (356,950) (5.469) (370.579) 337,883 $ $ The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located A summary of United States and foreign income before income taxes follows: $ United States Foreign $ 2011 1.901.905 2,124,115 4,026,020 2010 12.481 2,898,366 2.910,847 5 $ As discussed in Note 10 below, for segment reporting, Direct Import sales are included in the United States segment. However, the revenues are earned by our Asian subsidiary and income taxes are paid in Hong Kong As such, income of the Asian subsidiary is included in the foreign income before taxes. The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations. $ $ 2011 1,368,847 46,160 7,149 Federal income taxes at 34% statutory race State and local taxes, net of federal income tax effect Permanent items Charitable donations Foreign tax rate difference Change in deferred income tax valuation allowance Provision for income taxes 2010 989,688 3,322 24,316 (350,672) (383,179) 54.358 337,833 (308.250) 100,921 1.214,827 $ $ The following summarizes deferred income tax assets and liabilities: 2011 2010 Deferred income tax liabilities: Plant, property and equipment 5 $ 322,604 322.604 383,875 383.875 Deferred income tax assets: Asset valuations 426,429 372.774 Contribution carryforward 296.802 309,818 Operating loss carryforwards and credits 2.148.208 2,047,287 Pension 467,087 522.903 Foreign tax credit 48.847 Other 418.938 328.718 3.806,311 3.581,500 Net deferred income tax asset before valuation allowance 3.483.77 3.197.625 Valuation allowance 2.148.208) (2,047.287) Net deferred income et $ 335.499 5 1.150.339 In 2011, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result concluded no adjustment was necessary. The Company files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. The Company's evaluation of uncertain tax position was performed for the tax year ended December 31, 2008 and forward, the tax years which remain subject to examination by major jurisdictions as of December 31, 2011 In accordance with the Company's accounting policies any interest and penalties related to conta positions are recognized as a component of income tax expense The Company provides deferred income taxes on for diary eng, which are not considered permanently tested Earning permanently it would become be upon the sale oration of fore subsidiary or upon the remittance of dividends. During 2011 the Coward $450.000 of foreign earnings from Canadian biary Use the reading here Requirement 2 Note that Acme's tax rate reconciliation begins with 34% instead of 35%. We will discuss in class why this is the case. In preparing the case, take as given that 34% is the appropriate starting point for the reconciliation. a) The $46,160 shown for state and local taxes in the tax rate reconciliation differs from the $69,939 (consisting of $88,741 current and $18,802 deferred) reported for state (which also includes local) taxes in the tax provision summary. Why? b) Explain why none of the items giving rise to deferred tax assets and liabilities are shown in the tax rate reconciliation, except for the change in the valuation allowance. c) What does the summary of deferred tax items imply about the likelihood that Acme's NOL carryforward will be realized (i.e. used)? 7. Income Taxes The amounts of income tax expense (benefit) reflected in operations follow Exhibit 4 2011 2010 Current: 756,126 Federal State Foreign 103,040 11,312 88,741 532.827 1.377,694 594,110 708.462 Deferred: Federal State Foreign (142,281) (18.802) (1.784) (162.867) 1,214,827 (8,160) (356,950) (5.469) (370.579) 337,883 $ $ The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located A summary of United States and foreign income before income taxes follows: $ United States Foreign $ 2011 1.901.905 2,124,115 4,026,020 2010 12.481 2,898,366 2.910,847 5 $ As discussed in Note 10 below, for segment reporting, Direct Import sales are included in the United States segment. However, the revenues are earned by our Asian subsidiary and income taxes are paid in Hong Kong As such, income of the Asian subsidiary is included in the foreign income before taxes. The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations. $ $ 2011 1,368,847 46,160 7,149 Federal income taxes at 34% statutory race State and local taxes, net of federal income tax effect Permanent items Charitable donations Foreign tax rate difference Change in deferred income tax valuation allowance Provision for income taxes 2010 989,688 3,322 24,316 (350,672) (383,179) 54.358 337,833 (308.250) 100,921 1.214,827 $ $ The following summarizes deferred income tax assets and liabilities: 2011 2010 Deferred income tax liabilities: Plant, property and equipment 5 $ 322,604 322.604 383,875 383.875 Deferred income tax assets: Asset valuations 426,429 372.774 Contribution carryforward 296.802 309,818 Operating loss carryforwards and credits 2.148.208 2,047,287 Pension 467,087 522.903 Foreign tax credit 48.847 Other 418.938 328.718 3.806,311 3.581,500 Net deferred income tax asset before valuation allowance 3.483.77 3.197.625 Valuation allowance 2.148.208) (2,047.287) Net deferred income et $ 335.499 5 1.150.339 In 2011, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result concluded no adjustment was necessary. The Company files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. The Company's evaluation of uncertain tax position was performed for the tax year ended December 31, 2008 and forward, the tax years which remain subject to examination by major jurisdictions as of December 31, 2011 In accordance with the Company's accounting policies any interest and penalties related to conta positions are recognized as a component of income tax expense The Company provides deferred income taxes on for diary eng, which are not considered permanently tested Earning permanently it would become be upon the sale oration of fore subsidiary or upon the remittance of dividends. During 2011 the Coward $450.000 of foreign earnings from Canadian biary Use the reading here