Question

E10.15 Reporting the Provision for Income Taxes. Smith & Sons Company presented the following information in the income tax footnote in its annual report:

Note 13. Income Taxes Provision for income taxes includes the following (in thousands)

Current payable End-of-year

U.S. ....................................................... $4,028

Foreign .................................................... 438

Deferred

U.S. ....................................................... 2,880

Foreign .................................................... (174)

Total ........................................................ $7,172

How much tax expense did Smith & Sons report on its income statement for the year? How much of the

reported income tax expense was paid currently and how much was deferred to a future period for payment?

What is implied by the negative foreign deferred income taxes of $174

Cash paid for taxes?

Tax deferred (indicate if asset or liability balance)?

Tax expense?

Please give a breakout of the solution - trying to understand this concept

Answer 1

1) The total tax expenses reported by the Smith & Sons is $7,172. Out which income tax pertaining to current year is ($4,028 + $438) = $4,466 and deferred tax expenses amounted to ($2880 - $174) = $2,706.

2) Negative foreign deferred income taxes means that this is a temporary difference. Currently the Company has paid tax on this item but in future it will reverse and tax benefit will accrue to the Company.

3) Cash paid for taxes is the actual amount of taxes paid during the year. Provision for tax is mentioned above i.e. $4,466.

4) Currently, Company PnL shows deferred tax expense (net). Only PnL Statement is available above, so net deferred tax asset or liability cannot be assessed. The Company may have asset or liability based upon nature of deferred taxes created in previous years.

5) Tax expense is the summation of current year provision and deferred tax on those items.

6) Deferred tax originates for the temporary differences. In simple words, suppose if any unrealized income is currently included under PnL Statement but it not liable for tax. Then on that portion of income, deferred tax liability needs to be created with a corresponding deferred tax expense. Because the Company has to pay tax on this income when the Company will realize income. So on a conservative basis, deferred tax expense needs to be accounted when this unrealized income in current year only.