Please answer Case 16-56 from the attachments

16 - 54 Part 3 Additional Activities of a Business EOC 2. For the year ended December 31, 2013, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following: Interest on municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000 Premium expense on keyman life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Grim's enacted income tax is 30%. In its 2013 income statement, what amount should Grim report as current provision for income tax expense? (a) $45,000 (c) $60,000 (b) $51,000 (d) $66,000 CASES Discussion Case 16-54 What Are Deferred Income Taxes? Hurst Inc. is a new corporation that has just completed a highly successful first year of operations. Hurst is a privately held corporation, but its president, Byron Hurst, has indicated that if the company continues to do as well for the next four or five years, it will go public. By all indications, the company should continue to be highly profitable on both a short-term and a long-term basis. The controller of the new company, Lori James, plans on using the MACRS method of depreciating Hurst's assets and using the installment sales method of recognizing income for tax purposes. For financial statement presentation, straight-line depreciation will be used, and all sales will be fully recognized in the year of sale. There are no other differences between book and taxable income. Hurst has hired your firm to prepare its financial statements. You are now preparing the income statement. The controller wants to show, as income tax expense, the amount of the tax liability actually due. \"After all,\" James reasons, \"that's the amount we'll actually pay, and in light of our plans for continued expansion, it's highly unlikely that the temporary differences will ever reverse.\" Draft a memo to the controller outlining your reaction to the plan. Give reasons in support of your decision. Discussion Case 16-55 Why Aren't Deferred Taxes Discounted? Tyler Dee is the controller for Martinez Company, a major employer in the area. Tyler has just come from a meeting of a local civic group. The meeting was an opportunity for Tyler to present and explain Martinez's financial statements for the fiscal year recently ended. A significant amount of time was spent discussing the large deferred tax liability reported by Martinez. Several members of the civic group questioned Tyler about the nature of this liability. In particular, Tyler was asked why the liability wasn't discounted to reflect the time value of money. Tyler had no real answer, except to mumble something like, \"That's just the way the standard is written.\" How might Tyler have better explained the lack of discounting of deferred taxes? Discussion Case 16-56 Raising Tax Rates: Does It Help Me or Hurt Me? When the corporate tax rate was lowered from 46% to 34% in 1986, most firms that had adopted the asset and liability method of deferred tax accounting reported onetime gains as a result of the revaluation of their deferred tax items. In fact, one writer claimed that this lowering of income tax rates \"freed a large chunk of money that had been accumulated to pay deferred taxes at the former higher rate.\" In early 1993, Congress was considering raising the corporate income tax rate. One proposal was to raise the top corporate rate from 34% to 36%. Accounting experts pointed out that the increase in the tax rate would cause some firms to report one-time losses and other firms to report one-time gains. EOC Income Taxes 16 - 55 1. Why did the lowering of tax rates in 1986 result in most firms reporting gains, whereas an increase in tax rates in 1993 would cause some firms to report gains and some firms to report losses? 2. Comment on the writer's statement that the lowering of income tax rates \"freed a large chunk of money.\" SOURCES: Rick Wartzman, \"Rise in Corporate Taxes Would Force Many Big Companies to Take Charges,\" The Wall Street Journal, February 11, 1993, p. A2; Lee Berton, \"FASB Is Expected to Issue Rule Allowing Firms to Post Big, One-Time Gains,\" The Wall Street Journal, November 4, 1987, p. 4. Discussion Case 16-57 Is a Valuation Allowance Needed? Assume that you go to work for one of the large accounting firms upon your graduation from college and that for your first assignment, you are asked to review the deferred income tax asset account to determine whether a valuation allowance seems to be warranted. You remember talking about deferred income taxes in your intermediate accounting class, but the problems always told you whether an allowance was required or not. Now you must examine the facts to help determine the need for an allowance. What factors would you consider in making your recommendation? Case 16-58 Deciphering Financial Statements (The Walt Disney Company) The 2009 financial statements for The Walt Disney Company can be found on the Internet. 1. Using the financial statements and information contained in the notes, determine how much income tax expense Disney reported for the fiscal year ended October 3, 2009. 2. Referring to the note on income taxes, how much of the tax expense relates to current items, and how much relates to deferred items? 3. Disney notes that its effective income tax rate for 2009 was 36.2%. Using information from the income statement, determine how that number was computed. 4. Note that Disney has a valuation allowance of $388 million. In the journal entry establishing this allowance account, what would have been the debit and the credit? 5. Why was Disney's effective income tax rate higher than the U.S. federal income tax rate of 35.0% in 2009? [Hint: Look at Note 10 (Income Taxes).] 6. Explain why the effective income tax rate differs from company to company. 7. Do differences in effective tax rates reflect the impact of temporary book-tax differences or permanent book-tax differences? Explain. 8. How much cash did Disney pay for income taxes during 2009? Case 16-59 Deciphering Financial Statements (Sara Lee Corporation) Sara Lee Corporation owns the following brands: Ball Park franks, Sara Lee bakery goods, Hillshire Farm, Jimmy Dean, Kiwi shoe care products, and many other products. The following information relates to the company's deferred taxes. Sara Lee Corporation and Subsidiaries Income Taxes Current and deferred tax provisions (benefits) were (in millions): 2009 2008 2007 Current U.S. Foreign State Deferred Current Deferred Current Deferred $ 89 $(61) $310 $(247) $ 18 $(144) 214 (22) 168 (32) 123 4 0 (10) 12 (4) (8) $137 $(148) 4 $307 $(83) $468 $(267)