The financial statements of Ford Motor Company reveal the information regarding income taxes shown in Exhibit 2.8.
Required
a. Assuming that Ford had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for Year 10? Explain.
b. Did net loss before taxes for financial reporting exceed or fall short of taxable loss for Year 11 ? Explain.
c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or subtraction for Year 10? For Year 11?
d. Firms must recognize expenses related to employee benefit plans as employees provide services but claim an income tax deduction only when they make cash payments to the benefit plan. Why are deferred taxes related to employee benefit plans disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between Year 9 and Year 11.
e. Firms must recognize expenses related to dealer and customer allowances and claims when they recognize sales revenues but claim an income tax deduction when they make cash payments or provide warranty services. Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between Year 9 and Year 11.
f. Firms must recognize expenses for credit losses as they recognize sales revenues but claim an income tax deduction when they establish the uncollectibility of a particular customer's account. Why are deferred taxes related to credit losses disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between Year 9 and Year 11.
g. Ford uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between Year 9 and Year 11.
h. Ford leases automobiles and trucks to customers under multiyear leases. For financial reporting, Ford treats these leases as capital, or financing, leases, with income from the manufacturing activity recognized at the time of delivery of the vehicle to the customer and interest revenue on the finance receivable recognized over time. For tax reporting, Ford treats these arrangements as operating leases, with rent revenue recognized over time as customers make periodic lease payments. Why are deferred taxes related to finance receivables disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between Year 9 and Year 11.