Alpha Geek
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The financial statements of Starbucks Corporation are presented in Exhibits 1.26–1.28 (see pages 78–80). The income tax note to those financial statements reveals the information regarding income taxes shown in Exhibit 2.16.
a. Assuming that Starbucks had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2007? Explain.
b. Did book income before taxes for financial reporting exceed or fall short of taxable income for 2008? Explain.
|
For the Year Ended September 28 and September 30, respectively: |
2008 |
2007 |
|
Income Tax Expense |
|
|
|
Current: |
|
|
|
Federal |
$180.4 |
$326.7 |
|
Foreign |
40.4 |
65.3 |
|
State |
34.3 |
31.2 |
|
Deferred |
(111.1) |
(39.5) |
|
Total |
$144.0 |
$383.7 |
|
|
|
|
|
As of the Year Ended September 28 and September 30, respectively: |
2008 |
2007 |
|
Components of Deferred Tax Assets and Liabilities |
|
|
|
Deferred tax assets: |
|
|
|
Accrued occupancy costs |
$ 54.8 |
$ 47.6 |
|
Accrued compensation and related costs |
56.2 |
65.1 |
|
Other accrued expenses |
25.2 |
9.4 |
|
FIN 47 asset |
13.3 |
14.3 |
|
Deferred revenue |
36.0 |
18.3 |
|
Asset impairments |
80.8 |
14.9 |
|
Foreign tax credits |
26.1 |
11.1 |
|
Stock-based compensation |
79.6 |
66.8 |
|
Other |
49.6 |
29.2 |
|
Total Deferred Tax Assets |
$421.6 |
$276.7 |
|
Valuation allowance |
(20.0) |
(13.7) |
|
Net Deferred Tax Assets |
$401.6 |
$263.0 |
|
Deferred tax liabilities: |
|
|
|
Property, plant, and equipment |
$ (18.1) |
$ (22.9) |
|
Other |
(21.4) |
(23.9) |
|
Total Deferred Tax Liabilities |
$(39.5) |
$(46.8) |
|
Net Deferred Tax Asset |
$362.1 |
$216.2 |
c. 
Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or subtraction for 2007? For 2008?
d. Starbucks rents retail space for its coffee shops. It must recognize rent expense as it uses rental facilities but cannot claim an income tax deduction until it pays cash to the landlord. Suggest the scenario that would give rise to a deferred tax asset instead of a deferred tax liability related to occupancy cost.
e. Starbucks recognizes an expense related to retirement benefits as employees ren- dered services but cannot claim an income tax deduction until it pays cash to a retirement fund. Why do the deferred taxes for deferred compensation appear as a
deferred tax asset? Suggest possible reasons why the deferred tax asset decreased between the end of 2007 and the end of 2008.
f. Starbucks reports deferred revenue for sales of stored value cards, such as the Starbucks Card and gift certificates. These amounts are taxed when collected, but not recognized in financial reporting income until tendered at a store. Why does the tax effect of deferred revenue appear as a deferred tax asset? Why might the value of this deferred tax asset doubled from 2007 to 2008?
g. Starbucks recognizes a valuation allowance on its deferred tax assets to reflect “net operating losses of consolidated foreign subsidiaries.” Presumably, these are included in “Other” deferred tax assets. Why might the valuation allowance have increased between 2007 and 2008?
h. Starbucks uses the straight-line depreciation method for financial reporting and accelerated depreciation for income tax reporting. Why do the deferred taxes related to depreciation appear as deferred tax liabilities? Suggest possible reasons why the amount of the deferred tax liability related to depreciation decreased between 2007 and 2008.
