ABC Inc. is in the business of airframe maintenance, modification and retrofit services, avionics and aircraft interior installations, the overhaul and repair of aircraft engines, and other related services.
The following are excerpted from its income statement for the year ended December 31, 2014.
The book value of the company's inventories increased from $91,130 at the end of 2013 to $127,777 at the end of 2014.

1. Prepare a schedule reconciling the statutory and effective tax rates of ABC Inc. for the year ended 2014.
2. Provide the journal entry to record the income tax expense for 2014, showing separately the effects on deferred tax asset, valuation allowance, and deferred tax liability.
3. For each component of deferred tax asset/liability, provide possible reasons for the change in its value from 2013 to 2014.
Motorola and Intel are both in the semiconductor industry and compete in many of the same product sectors. But each uses a different depreciation method. Motorola's Year 2 10-K states the following:
Depreciation is recorded principally using the declining-balance method based on the estimated useful lives of the assets (buildings and building equipment, 5-50 years; machinery and equipment, 2-12 years).
So, Motorola is using accelerated depreciation for most of its assets. By contrast, Intel's Year 2 report says:
Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 2 to 4 years; land and buildings, 4 to 45 years.
1. Using the information provided and the analytical techniques illustrated in the chapter, determine the tax depreciation for Motorola and Intel for Year 2.
2. Adjust each firm's pre-tax income to reflect the same depreciation method and useful lives used for tax purposes.
3. Explain why the adjusted numbers provide a better basis for comparing the operating performance of the two companies.

  • CreatedSeptember 10, 2014
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