Integrative Case 2.1: Starbucksa. Taxable income exceeded book income before income taxes for Year 3 because income taxes currently payable exceeded total income tax expense. Also, the net deferred tax asset increased between the end of Year 2 and the end of Year 3, indicating that Starbucks prepaid taxes relative to book income.b. The answer to Part b. is the same as for Part a. above.c. Starbucks will report a subtraction from net income when computing cash flow from operations for the income taxes paid in excess of the amount reported as income tax expense in the income statement. Another way to understand this adjustment is to note that the current portion of income tax expense exceeds total income tax expense.d. Starbucks recognized the losses for financial reporting as soon as the losses became apparent, but cannot claim a tax deduction until later when they sell the securities and realize the loss.e. Starbucks recognizes deferred compensation expense for financial reporting earlier than it claims an income tax deduction. When Starbucks contributes cash to a retirement fund in later years, it can claim an income tax deduction. The increasing amount for the deferred tax asset related to deferred compensation suggests that the firm grew continually over the two-year period and/or increased the deferred compensation benefits.f. Starbucks recognizes rent expense earlier for financial reporting than for income tax reporting in order for the firm to report a deferred tax asset. It is likely that Starbucks pays some of its rentals after the rental period. Perhaps the rental fee includes a portion based on revenue for a period. Starbucks cannot pay this amount until after the end of the period, when it can compute the rental due.g. Note that the valuation allowance at the end of each year is less than the deferred tax asset for equity investments each year. Thus, Starbucks expects to realize some, but not all, of the tax benefits of these losses. The deferred tax asset for equity investments increased between the end of Year 2 and the end of Year 3 and so did the valuation allowance. The deferred tax asset for equity investments declined between the end of Year 3 and the end of Year 4 and so did the valuation allowance. Thus, there seems to be a relation between the amount of the investment losses and the valuation allowance.h. Depreciation recognized each year and cumulatively for tax reporting exceeded depreciation recognized for financial reporting. Starbucks likely has more depreciable assets in the early years of their depreciable lives when accelerated depreciation exceeds straight-line depreciation than it has depreciable assets in the later years of their lives when straight-line depreciation exceeds accelerated depreciation. The increasing amount of deferred tax liabilities related to depreciation temporary differences suggests that Starbucks increased its capital expenditures each year.