Question

You have been hired as a consultant to advise on how to present the tax differences between books and tax returns on the balance sheet of RFH company. There are a few questionable items which the current controller Mary Sims is confused as to proper presentation. The timing differences are 1) $1,5000,000 as a result of depreciation timing difference (books S-L versus MACRS tax return). 2) There also was a bad debt reserve increase from the prior year of $250,000. RFH Company is a manufacturing company who accrued $300,000 in warranty liability at year-end and could not deduct it on the tax return for this year but warranty will be paid out in the following year. A lawsuit in the amount of $450,000 was accrued on the books at year-end awaiting the final legal court judgment. Prior court cases have ruled that this $500,000 can be paid evenly over 3 years. You have to write a memo to Mary Sims advising her how to classify these temporary tax differences on her books at year-end. In your memo give FASB sources for her that validates your balance sheet presentation. Develop your recommendations and conclusions and state them and their rationale in one to two pages Then seperatly: prepare a comprehensive research memorandum on the case that you chose.

Answer 1

If there is any timing difference between books and tex returns then it should be shown as defferred tax in Profit & Loss and Balance Sheet (deferred tax asset or liabilities) as well.

1. Depreciation 15,00,00,000 * rate of tax = 15,00,00,000* 30%* = 4,50,00,000

* Assume rate of Tax = 30%

If dep charged in books less than tax return then deferred tax liabilities will be created

If dep charged in books more than tax return then deferred tax asset (DTA) will be created

2.Bad debts reserve increse it means we have charged the expenses in books but not allowed as deduction in tax return so that we have have to create deffered tax asset on $ 250000* rate of tax.

3, In regard to warrany if company could not get deduction in tax return then DTA will be created if it is allowable expense in the subsequent year. if company couldnot get deduction in the subsequent year then it will be treated as permanent differnce the no deferred tax will be created.

4. Law Suit: if any liabilities accrued then it'll be recognised in books and if deduction is not allowed in tax return then deferred tax will be created. expenses to be booked = amount/3 years = 450000/3 = 150000