Interpreting the Income Tax Expense Footnote

Interpreting the Income Tax Expense Footnote The income tax footnote to the financial statements of FedEx Corporation follows.

Interpreting the Income Tax Expense Footnote

The income tax footnote to the financial statements of FedEx Corporation follows.

The components of the provision for income taxes for the years ended May 31 were as follows:

($ millions) 2008 2007 2006
Current provision      
Domestic      
Federal $ 514 $ 829 $ 719
State and local 74 72 79
Foreign 242 174 132
  830 1,075 930
Deferred provisions (benefit)      
Domestic      
Federal 31 62 129
State and local (2) 27 13
Foreign 32 35 21
  61 124 163
Provision for income taxes $ 891 $ 1,199 $ 1,093

(a)What is the amount of income tax expense reported in FedEx’s 2008, 2007, and 2006 income statements? 
2008 Income Tax Expense = $Answer 891 million
2007 Income Tax Expense = $Answer 1199 million
2006 Income Tax Expense = $Answer 1093 million

(b) What percentage of total tax expense is currently payable in each year?

Round your answers to the nearest percent.
2008 Answer 93%
2007 Answer 90%
2006 Answer 85%

Which of the following statements best describes why the percentages of total tax expense are different each year? 

Differences in the percentage of income tax expense that is currently payable arise because tax laws change frequently.

Differences in the percentage of income tax expense that is currently payable arise solely because of fluctuations in the amount of taxable income.

Differences in the percentage of income tax expense that is currently payable arise because of fluctuation in the amount of deferred income tax assets or liabilities.

Differences in the percentage of income tax expense that is currently payable arise because companies typically defer tax payments in periods of reduced cash flow.

(c) Which of the following provides the best example that can give rise to an increase in the deferred tax liability? 

Companies use an accelerated depreciation method for tax purposes that results in a lower taxable income in the earlier years of the assets life vis-à-vis net income on the financial accounting books, which reflect straight-line depreciation for GAAP purposes.

Deferred tax liabilities arise in periods of higher taxable income.

Deferred tax liabilities generally arise because companies defer the payment of taxes in periods of low cash flow.

Restructuring accruals provide the best example of an event that gives rise to an increase in deferred tax liabilities.

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