ZAGG, "Zealous About Great Gadgets," began designing protective plastic shields for wristwatches in 2005. Today, the company is a market leader in mobile device accessories. ZAGG's patented invisibleSHIELD film protects tablet and smart phone screens around the world. Their product list also includes mobile keyboards, cases, headphones, and portable power. In 2016, ZAGG acquired iFrogz, a manufacturer of digital audio accessories in order to grow their product lines and expand distribution. ZAGG is currently traded on the NASDAQ.

Learning Objectives

• Understand the concepts underlying deferred income tax accounting.
• Understand and interpret the three primary disclosures provided in the income tax footnote to the financial statements.
• Use deferred income tax asset and liability information to infer the magnitude of differences between book and tax income and asset values.
• Understand the purpose of a deferred income tax asset valuation allowance.
• Understand how changes in income tax rates impact deferred income tax assets and liabilities.

Refer to the 2017 financial statements and footnote excerpts of ZAGG, Inc. at the end of this document.

Concepts

1. Describe what is meant by the term book income. Which number in ZAGG's statement of operation captures this notion for fiscal 2017? Describe how a company's book income differs from its taxable income.
2. In your own words, define the following terms:
   1. Permanent tax differences (also provide an example)
   2. Temporary tax difference (also provide an example)
   3. Statutory tax rate
   4. Effective tax rate
3. Explain in general terms why a company reports deferred income taxes as part of their total income tax expense. Why don't companies simply report their current tax bill as their income tax expense?
4. Explain what deferred income tax assets and deferred income tax liabilities represent. Give an example of a situation that would give rise to each of these items on the balance sheet.
5. Explain what a deferred income tax valuation allowance is and when it should be recorded.

Process

6. Consider the information disclosed in Note 8 Income Taxes to answer the following questions:
   1. Using information in the first table in Note 8, show the journal entry that ZAGG recorded for the income tax provision in fiscal 2017.
   2. Using the information in the third table in Note 8, decompose the amount of "net deferred income taxes" recorded in the income tax journal entry in part f.a. into its deferred income tax asset and deferred income tax liability components.
   3. The second table in Note 8 provides a reconciliation of income taxes computed using the federal statutory rate (35%) to income taxes computed using ZAGG's effective tax rate. Calculate ZAGG's 2017 effective tax rate using the information provided in their income statement. What accounts for the difference between the statutory rate and ZAGG's effective tax rate?
   4. According to the third table in Note 8 Income Taxes, ZAGG had a net deferred income tax asset balance of $13,508,000 at December 31, 2017. Explain where this amount appears on ZAGG's balance sheet.