its a group project your only doing the bottom part analysis J-K(a,b)
Intermediate Accounting II Deferred Tax Case Summer 2022 ZAGG, "Zealous About Great Gadgets," began designing protective plastic shields for wristwatches in 2005. Today, the company is a market leader in mobile device accessories. ZAGG's patented invisibleSHIELD film protects tablet and smart phone screens around the world. Their product list also includes mobile keyboards, cases, headphones, and portable power. In 2016, ZAGG acquired iFrogz, a manufacturer of digital audio accessories in order to grow their product lines and expand distribution. ZAGG is currently traded on the NASDAQ. Learning Objectives · Understand the concepts underlying deferred income tax accounting. · Understand and interpret the three primary disclosures provided in the income tax footnote to the financial statements. · Use deferred income tax asset and liability information to infer the magnitude of differences between book and tax income and asset values. · Understand the purpose of a deferred income tax asset valuation allowance. · Understand how changes in income tax rates impact deferred income tax assets and liabilities. Refer to the 2017 financial statements and footnote excerpts of ZAGG, Inc. at the end of this document. Concepts a. Describe what is meant by the term book income. Which number in ZAGG's statement of operation captures this notion for fiscal 2017? Describe how a company's book income differs from its taxable income. b. In your own words, define the following terms: a. Permanent tax differences (also provide an example) b. Temporary tax difference (also provide an example) c. Statutory tax rate d. Effective tax rate c. Explain in general terms why a company reports deferred income taxes as part of their total income tax expense. Why don't companies simply report their current tax bill as their income tax expense? d. Explain what deferred income tax assets and deferred income tax liabilities represent. Give an example of a situation that would give rise to each of these items on the balance sheet. e. Explain what a deferred income tax valuation allowance is and when it should be recorded. Process f. Consider the information disclosed in Note 8 – Income Taxes to answer the following questions: a. Using information in the first table in Note 8, show the journal entry that ZAGG recorded for the income tax provision in fiscal 2017. b. Using the information in the third table in Note 8, decompose the amount of "net deferred income taxes" recorded in the income tax journal entry in part f.a. into its deferred income tax asset and deferred income tax liability components. c. The second table in Note 8 provides a reconciliation of income taxes computed using the federal statutory rate (35%) to income taxes computed using ZAGG's effective tax rate. Calculate ZAGG's 2017 effective tax rate using the information provided in their income statement. What accounts for the difference between the statutory rate and ZAGG's effective tax rate? d. According to the third table in Note 8 – Income Taxes, ZAGG had a net deferred income tax asset balance of $13,508,000 at December 31, 2017. Explain where this amount appears on ZAGG's balance sheet. The third table in Note 8 discloses the details of ZAGG's deferred income tax assets and liabilities that arise from various temporary differences. Use the information in this table to answer questions g and h. Where necessary, you may assume that ZAGG's total statutory income tax rate is the sum of its federal statutory tax rate of 35% and a blended state statutory tax rate of 3%. g. The largest component of ZAGG's deferred income tax liability, labeled "Property and equipment," relates to differences between book and tax depreciation expense. a. As of December 31, 2017, which system recognized a greater expense over time relating to depreciation – book or tax? Describe what information you sued to make this assessment. b. Estimate the dollar magnitude of the cumulative difference in depreciation expense between the two systems as of December 31, 2017 using the chart below. Begin with step 1 and work backwards. Cumulative difference in book and tax depreciation expense × Statutory income tax rate = Deferred income tax liability relating to property and equipment at 12/31/2017 Step 3 Step 2 Step 1 c. Using the information in the chart above, determine the balance in "Property and equipment, net" on the balance sheet at December 31, 2017 if tax depreciation had been used through the assets' lives instead of the reported method. h. One of ZAGG's deferred income tax asset components relates to the "Allowance for doubtful accounts." a. During the year ended December 31, 2017, did the book or the tax system recognize a greater expense for doubtful accounts? Describe what information you used to make this assessment. b. Estimate the dollar magnitude of the difference in bad debt expense between the book and tax system for the year ended December 31, 2017 using the chart below. Begin with step 1 and work backwards. Current period difference in book and tax bad debt expense in 2017 × Statutory income tax rate = Change in the deferred income tax asset relating to the allowance for doubtful accounts Step 3 Step 2 Step 1 i. What is the amount of the deferred income tax asset valuation allowance at December 31, 2017? Explain how ZAGG determined this amount and why they determined that a valuation allowance was necessary. Analysis j. Suppose that on the first day of the next fiscal year, the federal statutory tax rate changed from 35% to 21%. What journal entry related to the net deferred tax asset would ZAGG record? You may assume that the state statutory tax rate will not change. [Hint: when income tax rates change, companies must "re-value" their deferred income tax assets and liabilities.] k. On June 21, 2016, ZAAG acquired iFrogz for $96.2 million. The excess of the acquisition price over the fair value of iFrogz's net assets (ie, tangible assets and identifiable intangible assets, net of assumed liabilities) was $6.925 million, which was recorded as "Goodwill" at the time of the acquisition. a. For book purposes, goodwill is tested annually for impairment. In Note 7, ZAGG discloses that it conducted a goodwill impairment analysis during the fourth quarter of 2017. What was the amount of the impairment in goodwill that resulted from this analysis in 2017? b. For tax purposes, goodwill is amortized annually and is, therefore, a deductible expense on a company's tax return. ZAGG amortized goodwill over a period of 15 years. Note 8 reports a deferred income tax asset of $1,801,000 related to goodwill at December 31, 2017. Explain how goodwill created a deferred income tax asset for ZAGG. Show how ZAGG arrived at this number. You may assume a 35% federal statutory tax rate and a 3% blended state statutory tax rate and that ZAGG began amortizing goodwill for tax purposes starting in July, 2016. [Hint: determine the net (ie, after amortization) value of goodwill for tax purposes to compare to the net book value of goodwill.] ZAGG INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par value) 2017 2016 ASSETS Current assets Cash and cash equivalents $ 20,177 $ 26,433 Accounts receivable, net of allowances of $2,974 in 2017 and $2,070 in 2016 54,561 45,450 Inventories 39,988 29,622 Prepaid expenses and other current assets 9,547 1,593 Deferred income tax assets 6,912 5,132 Total current assets 131,185 108,230 Investment in HzO 2,013 4,879 Property and equipment 4,862 4,162 net of accumulated depreciation at $3,317 in 2017 and $1,857 in 2016 Goodwill 1,484 6,925 Intangible assets 57,905 73,691 net of accumulated amortization at $13,790 in 2017 and $3,989 in 2016 Deferred income tax assets 6,596 82 Note receivable 583 1,349 Other assets 1,457 3,010 Total assets $ 206,085 $ 202,328 LIABILITIES AND EQUITY Current liabilities Accounts payable $ 19,027 $ 16,013 Income taxes payable 3,062 4,294 Accrued liabilities 3,754 3,886 Accrued wages and wage related expenses 2,554 1,468 Deferred revenue 722 320 Current portion of note payable 6,000 2,372 Sales returns liability 6,697 5,387 Total current liabilities 41,816 33,740 Revolving line of credit 22,173 23,332 Noncurrent portion of note payable 18,000 42,628 Total liabilities 81,989 99,700 Stockholders' equity Common stock, $0.001 par value; 100,000 shares authorized; 31,215 and 29,782 shares issued and outstanding, respectively 31 30 Additional paid-in capital 77,234 70,248 Cumulative translation adjustment (57 ) (33 ) Note receivable collateralized by stock (566 ) (566 ) Retained earnings 47,454 32,949