Question

Analyzing and Interpreting Tax Footnote

Under Armour, Inc. reports total tax expense on its income statement for year ended December 31, 2010 of $40,442 and cash paid for taxes of $38,773.
The tax footnote in the company's 10-K filing, reports the following deferred tax information.
Deferred tax assets and liabilities consisted of the following (in thousands):

December 31 ($ thousands)	2010	2009
Deferred tax assets
State tax credits, net of federal tax impact	$ 1,750	$ --
Tax basis inventory adjustment	3,052	1,874
Inventory obsolescence reserves	2,264	2,800
Allowance for doubtful accounts and other reserves	8,996	7,042
Foreign net operating loss carryforward	10,917	9,476
Stock-based compensation	8,790	5,450
Intangible asset	372	1,068
Deferred rent	2,975	1,728
Deferred compensation	1,449	1,105
Other	2,709	3,151
Total deferred tax assets	43,274	33,694
Less: valuation allowance	(1,765)	--
Total net deferred tax assets	41,509	33,694
Deferred tax liabilities
Prepaid expenses	(1,865)	(1,133)
Property, plant and equipment	(3,104)	(5,783)
Total deferred tax liabilities	(4,969)	(6,916)
Total deferred tax assets, net	$ 36,540	$ 26,778

(a) Did Under Armour's deferred tax assets increase or decrease during the most recent fiscal year?
Under Armour's deferred tax assets Answerdecreasedincreased by $Answer

0.00 points out of 1.00

(thousands).
Which of the following best summarizes our interpretation of an increase in a company's deferred tax assets for the most recent year?

Deferred tax assets increased during the year, which means that the company reported more as a tax expense on its income statement than it paid in taxes.

Deferred tax assets generally arise when tax deductions are less than tax expense reported in the income statement. Because deferred tax assets increased, we can concluded that tax deductions were greater than expense.

Deferred tax assets increased during the year, which means that the company's taxable income was less than in the prior year.

Deferred tax assets increased during the year, which means that the company paid more taxes than it reported as the tax expense on its income statement.

(b) Did Under Armour's deferred tax liabilities increase or decrease during the most recent fiscal year?
Under Armour's deferred tax liabilities Answerdecreasedincreased by $Answer

0.00 points out of 1.00

(thousands).
Which of the following statements best describes the reason for the change in deferred tax liabilities during the most recent year?

The deferred tax liabilities increased during the recent year because they paid down their tax liability.

The deferred tax liabilities decreased during the recent year possibly because the company is now depreciating its fixed assets more for GAAP purposes than it is for tax purposes.

The deferred tax liabilities decreased during the recent year as a result of the reduction in its effective tax rate.

The deferred tax liabilities decreased during the recent year because the company's taxable income was less than in prior year.

(c) The company recorded a valuation allowance during the year. This allowance relates to foreign net operating tax losses. Which of the following statements appears to be false regarding the foreign net operating tax losses and the valuation allowance.

The company's tax returns have reported losses in foreign jurisdictions. As of the end of 2010, there were insufficient profits and the tax losses could not be used in the current period.

As of December 31, 2010, the company believed some of the deferred tax assets associated with foreign tax loss carryforwards would expire unused. Therefore, a valuation allowance was recorded against the company's net deferred tax assets.

An increase to a valuation allowance will decrease current year income.

An increase to a valuation allowance will increase current year income.

What proportion of the foreign net operating losses does the company believe will likely expire unused? (Round your answer to the nearest whole number)
Answer

0.00 points out of 1.00

%

(d) Explain how the valuation allowance affected 2010 net income.

Under Amour's valuation allowance account increased during the year, which means net income increased.

Under Amour's valuation allowance account decreased during the year, which means net income increased.

Under Amour's valuation allowance account increased during the year, which means net income decreased.

Under Amour's valuation allowance account decreased during the year, which means net income decreased.

(e) Use the financial statement effects template to record Under Armour's income tax expense for the current fiscal year along with the changes in both deferred tax assets and liabilities. Assume that income taxes payable increased by $11,431 thousand.

Use negative signs with your answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Record tax expense, part cash and part deferred	Answer 0.00 points out of 1.00		Answer 0.00 points out of 1.00		Answer 0.00 points out of 1.00		Answer 1.00 points out of 1.00		Answer 0.00 points out of 1.00

Income Statement
Revenue	-	Expenses	=	Net Income
Answer 1.00 points out of 1.00		Answer 0.00 points out of 1.00		Answer 0.00 points out of 1.00

Answer 1

a. Under Armour's deferred tax assets increased by $7,815 (in thousands) from 2009 to 2010 (most recent fiscal year):

Working:- Year 2010 Year 2009

Total net deferred tax assets

41,509

33,694

Deferred Tax Assets Increased by, $41,509-$33,694 = $7,815 (in thousands)

The following best summarizes our interpretation of an increase in a company's deferred tax assets for the most recent year:-

Deferred tax assets increased during the year, which means that the company paid more taxes than it reported as the tax expense on its income statement.

b. Under Armour's deferred tax liabilities decreased by $1,947 (in thousands) from 2009 to 2010 (most recent fiscal year)

Working:- Year 2010 Year 2009

Total deferred tax liabilities (4,969) (6,916)

Deferred Tax Liabilities decreased by, $6,916-$4,969 = $1,947 (in thousands)

The following statements best describes the reason for the change in deferred tax liabilities during the most recent year:-

The deferred tax liabilities decreased during the recent year possibly because the company is now depreciating its fixed assets more for GAAP purposes than it is for tax purposes.

c. The company recorded a valuation allowance during the year. This allowance relates to foreign net operating tax losses. Whereby, the following statement appears to be false regarding the foreign net operating tax losses and the valuation allowance:-

-An increase to a valuation allowance will increase current year income.

16% is the proportion of the foreign net operating losses which the company believe will likely expire unused.

Working :-

Total valuation allowance for year 2010 (VA) = $1,765

Foreign Net Operating Loss (FNOL) carry forward for the year 2010= $10,917

Proportion of FNOL believed to be unused = 1,765/10917*100% = 16.17%

d. Under Amour's valuation allowance account increased during the year, which means net income decreased.

Year 2010 Year 2009

Less: valuation allowance (1,765) ---------