Interpreting income tax disclosures. Exhibit 11.23 presents information from the income tax note to the financial statements for a computer manufacturer for the years ending December 31, 2008, 2007, and 2006.

a. Present the journal entry to recognize income tax expense and income taxes payable for the year ended December 31, 2007. Use a single deferred tax account instead of separate accounts for deferred tax assets and deferred tax liabilities.

b. Repeat part a for the year ended December 31, 2008.

c. Why do the amounts for deferred taxes in the entries in parts a and b not equal the change in deferred tax assets and deferred tax liabilities in Exhibit 11.23 for each year?
d. Why do state and local taxes appear as an addition in the reconciliation between the statutory tax rate and the effective tax rate?
e. Why does this firm show both deferred tax assets and deferred tax liabilities for retirement benefits?
f. What does the reporting of a deferred tax asset for bad debts and warranties suggest about when this firm recognizes expenses for these items for financial reporting and for tax reporting?
g. This firm leases equipment to its Customers, which gives rise to a deferred tax liability, Does this firm likely account for these leases as operating leases or as capital leases for financial reporting? Which method of accounting for these same leases does this firm likely use for tax reporting?
h. What does the reporting of a deferred tax liability for software development costs suggest about when this firm recognizes an expense for this item for financial reporting and for taxreporting?

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Income Tax Disclosures EXHIBIT 11.23 (amounts in millions) (Problem 34) 2008 2007 Income Before Income Taxes. $12,226 $13,317 Income Tax Expense: $ 2,177 Current $2,047 Deferred... 1.724 2,185 Total Income Tax Expense.. $ 4,232 $ 3,901 Income Taxes at the Statutory Tax Rate of 35%. State and Local Taxes (net of federal tax benefit) 35% 35% Foreign Tax Rates ... (5) (5) Other . (2) 29% Effective Tax Rate. 35% October 31: 2008 2007 2006 COMPONENTS OF DEFERRED TAXES Deferred Tax Assets: $ 3,147 $ 3,022 Stock-Based and Other Compensation. $ 3,122 Retirement Benefits..... 3,002 3,039 3,908 Capitalized Research and Development. 1,355 1,728 1,794 Bad Debts and Waranties 724 937 1,050 Other.. 3,128 3,471 4,855 (510) $10,846 (562) $11,635 (603) Valuation Allowance .. Total Deferred Tax Assets $14,126 Deferred Tax Liabilities: $ 7,267 Retirement Benefits ... $ 2,906 $ 7,057 Deferred Lease Income 1,385 964 622 Software Development Costs. 505 348 381 Other ... 1,340 1,502 1,324 $ 6,136 $ 9,384 Total Deferred Tax Liabilities. $10,081