Exhibit 12.22 presents selected information from the notes to the financial statements of Catiman Limited, a manufacturer of farming equipment, for the years ending October 31, 2013, 2012, and 2011. Catiman applies U.S. GAAP.
a. Present the journal entry to recognize Catiman’s income tax expense and income taxes payable for the year ended October 31, 2012. Be sure to consider the effect on deferred tax asset and deferred tax liability accounts.
b. Repeat part a for the year ended October 31, 2013.
c. Why do state and local taxes appear as an addition in the tax reconciliation between income taxes at the statutory tax rate and income tax expense?
d. Catiman combines the effect of nondeductible costs and other items in its income tax reconciliation. Will nondeductible costs have the effect of increasing or decreasing the effective tax rate? Explain.
e. Explain why a recognized health care liability and a recognized pension liability give rise to deferred tax assets, whereas a recognized prepaid pension asset gives rise to a deferred tax liability.
f. Sales allowances relate to amounts that Catiman pays after the time of sale for warranty repairs, rebates, and returned equipment. Why do sales allowances give rise to a deferred tax asset?
g. What is the likely reason that the valuation allowance on deferred tax assets increased continually during the three years?
h. What is the likely explanation for the direction of the change in the deferred tax liability relating to depreciation?
i. Catiman leases equipment to its customers, which gives rise to a deferred tax liability.
Does Catiman likely account for these leases as operating leases or as capital leases for financial reporting? Which method of accounting for these same leases does the firm likely use for tax reporting?

  • CreatedMarch 04, 2014
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