The financial statements of Target Corporation, a retail chain, reveal the information regarding income taxes shown in Exhibit 2.6.
Required
a. Assuming that Target 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 3? Explain.
b. Did income before taxes for financial reporting exceed or fail short of taxable income for Year 4? 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 3? For Year 4?
d. Target does not contract with an insurance agency for property and liability insurance, but instead self-insures. Target recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses. When it experiences an actual loss, it charges it against the liability. The income tax law permits a deduction for such losses only in the year sustained when firms self-insure. Why are deferred taxes related to self-insurance 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 2 and Year 4.
e. Target treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in inventory for tax reporting. Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between Year 2 and Year 4.
f. Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services but claim an income tax deduction only when they make cash payments under the benefit plan. Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between Year 2 and Year 4.
g. Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues but claim an income tax deduction when they deem a particular customer's accounts uncollectible. 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 2 and Year 4.
h. Target 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 2 and Year 4.