World com in 2001 and 2002 capitalized basic switching costs from expenses to capital assets to the tune of $3.8 billion dollars with approximately $3.04 billion occurring in 2001. The corporate tax rate is 35 percent. For 2001, World com’s income before taxes was $2.432 billion and its income tax expense was $0.943 billion for 2001. Assume that World com, on its tax return, expenses the entire $3.04 billion.
Required:
a. Would World com’s actions have led to a situation of income tax allocation? Explain.
b. Do you think, based on the numbers shown above, that World com allocated the income taxes stemming from the incorrect capitalization of the switching expenses?