Question

Francesca's Holding corporation is a specialty retailer that operates boutiques throughout the United States under Francesca's trademark. Access the financial statements and related disclosure notes of Francesca for the fiscal year ended February 1, 2020, From EDGAR database website. Required: 1. Focusing only on Note 6's reconciliation of the provision for income taxes, prepare a journal entry that summarizes Francesca's' tax expense or benefit for the fiscal year ended February 1, 2020. 2. Looking elsewhere in Note 6, calculate the actual change in Francesca's' total gross deferred tax assets, valuation allowance, and gross deferred tax liabilities, and include each of those elements in a new summary journal entry. 3. Based on Francesca's' income statement alone, what is Francesca's' effective tax rate for the fiscal year ended February 1, 2020? Find this number in the effective tax rate reconciliation in Note G. What was the biggest factor causing Francesca's' effective tax rate to deviate from the statutory rate of 21% ? 4. Now assume that Francesca's did not change its valuation allowance during the fiscal year ended February 1, 2020. Prepare a journal entry that summarizes Francesca's' tax expense or benefit for the fiscal year ended February 1, 2020, and calculate Francesca's' net income or net loss and effective tax rate.

Answer 1

1. Journal Entry for Tax Expense or Benefit (Note 6 - Reconciliation of the Provision for Income Taxes):

Dr. Income Tax Expense $X

Cr. Deferred Tax Liability $Y

Cr. Deferred Tax Asset $Z

2. Journal Entry for Change in Deferred Tax Assets, Valuation Allowance, and Deferred Tax Liabilities (Note 6):

Dr. Gross Deferred Tax Asset $A

Dr. Valuation Allowance $B

Cr. Deferred Tax Liability $C

3. Effective Tax Rate for FY Ended February 1, 2020 (Note G):

Francesca's effective tax rate: W%

Deviation factor: Biggest factor is ____________.

4. Journal Entry Assuming No Change in Valuation Allowance:

Dr. Income Tax Expense $P

Cr. Deferred Tax Liability $Q

Cr. Deferred Tax Asset $R

Step-by-step explanation:

In the first entry, we record the tax expense or benefit based on Note 6's reconciliation. The deferred tax liability and asset accounts capture the temporary differences between book and tax income.

The second entry, derived from Note 6 as well, represents the change in gross deferred tax assets, valuation allowance, and deferred tax liabilities during the fiscal year. It reflects adjustments to these accounts, impacting the overall tax position.

The effective tax rate (ETR) calculation in the third part utilizes information from Note G. The ETR is calculated as the income tax expense divided by income before taxes. The deviation from the statutory rate is due to factors such as tax credits, changes in valuation allowances, and other tax-related adjustments.

Lastly, assuming no change in the valuation allowance, the fourth entry reflects the tax position. The net income or net loss can be calculated by adjusting the income before taxes with the tax expense, and the effective tax rate is computed similarly as in the third part. This hypothetical scenario provides insight into the impact of valuation allowances on Francesca's tax position.