Describe what is meant by the term book income

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Reference no: EM131139073

This assignment will assess the competency 6. Apply accounting procedures for income taxes, revenue recognition, and expense recognition.

Directions: Complete the "ZAGG Inc." Case, found in the Cases in Financial Reporting, 8th Edition. Complete the "Concepts," "Process," and "Analysis" questions located at the end of the case. Attachment of the assignment is on this post.

ZAGG Inc.-Deferred Income Taxes

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 invisibleSHIELDAn protects tablet and smart phone screens around the world. Their product list also includes mobile keyboards. cases, headphones, and portable power. In 2011, Z4AG 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 (Sources Company 2012 Form 10-IC).

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 2012 financial statements and footnote excerpts of ZAGG inc.


a. Describe what is meant by the term book income? Which number in ZAGG's statement of operation captures this notion for fiscal 2012? Describe how a company's book income differs from its taxable income.

b. In your own words, define the following terms:

i. Permanent tax differences (also provide an example)
ii. Temporary tax difference (also provide an example)
iii. Statutory tax rate
iv. 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.


f. Consider the information disclosed in Note $ - Income Taxes to answer the following questions:

i. Using information in the first table in Note 8, show the journal entry that ZAGG recorded for the income tax provision in fiscal 2012?

ii. Using the information in the third table in Note 8, decompose the amount of net deferred income taxes" recorded in income tax journal entry in pant 1. into its deferred income tax asset and deferred income tax liability components.

iii. 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 2012 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?

iv. 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, 2012. 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.

i. As of December 31, 2012, which system recognized a greater expense over time relating to depreciation - book or tax? Describe what information you used to make this assessment.

ii. Estimate the dollar magnitude of the cumulative difference in depreciation expense between the two systems as of December 31, 2012 using the chart below. Begin with step I and work up.

Cumulative difference in book and tax depreciation expense

Step 3


Statutory income tax rate

Step 2


Deferred income tax liability relating to property and equipment at 12/31,2012

Step 1

iii. Using the information in the chart above, determine the balance in "Property and equipment, net" on the balance sheet at December 31, 2012 if tax depreciation had been used throughout the assets' lives instead of the reported method?

h. One of ZAGG's deferred income tax assets components relate to the "Allowance for doubtful accounts."

i. During the year ended December 31, 2012, did the book or the tax system recognize a greater expense for doubtful accounts? Describe what information you used to make this assessment.

ii. Estimate the dollar magnitude of the difference in bad debt expense between the book and tax system for the year ended December 31, 2012 using the chart on the following page. Begin with step 1 and work up.

Current period difference in book and tax bad debt expense in 2012

Step 3


Statutory income tax rate

Step 2


Change in the deferred income tax asset relating to the allowance for doubtful accounts

Step 1

i. What is the amount of the deferred income tax asset valuation allowance at December 31, 2012? Explain how ZAGG determined this amount and why they determined that a valuation allowance was necessary.


j. Suppose that on the first day of the next fiscal year (January 1, 2013), the Internal Revenue Service changed the federal statutory tax rate from 35% to 30%, what journal entry related to the net deferred income tax asset would ZAGG record at the time of the tax change? You may assume that the state statutory 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, 2011, ZAGG acquired iFrogz for $96.2 million. The excess of the acquisition price over the fair value of iFrogz's net assets (i.e., 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.

i. For book purposes, both US GAAP (ASC 350) and International Accounting Standard (IAS 36) do not allow for the amortization of goodwill, but require that goodwill be tested annually for impairment. In Note 7, ZAGG discloses that it conducted a goodwill impairment analysis during the fourth quarter of 2012. What was the amount of the impairment in goodwill that resulted from this analysis in 2012?

ii. For tax purposes, goodwill is allowed to be amortized annually and is, therefore, a deductible expense in a company's tax return. ZAGG amortizes 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, 2012. 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, 2011. [Hint: determine the net (i.e., after amortization) value of goodwill for tax purposes to compare to the net book value of goodwill].

Attachment:- Case_ZAGG_Inc_Deferred_Income_Taxes.pdf

Reference no: EM131139073

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