Group Discussion Board Forum Instructions

For this collaborative discussion board, the instructor will place you into a group at the beginning of the course. For each forum, you will create 1 thread of at least 500 words. You must support your assertions with at least 2 citations other than the textbook; the Bible may be 1 of those sources. In addition to the thread, you will reply to the thread of at least 1 classmate. Each reply must be at least 250 words. Citations for the replies are required and encouraged. Everything must be in current APA format.

For each forum, submit your thread by 11:59 p.m. (ET) on Thursday of the assigned modules/weeks, and submit your replies by 11:59 p.m. (ET) on Monday of the same modules/weeks.

1 day ago 

Yaedam Shin 

RE: Communications Case 16-4

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Yaedam Shin

29794517

Module 5, Group 3, Case 13-4

July 31, 2018

1. 

Communication Case 16-4 – Read Judgment Case 16-4 and answer it.

To: Randy Patey, the treasurer, Engineered Solution Company

From: Yaedam Shin, the controller, Engineered Solution Company

Date: August 2, 2018

Subject: Accounting for income taxes

Dear Mr. Randy Patey,

Under the asset-liability approach, the objective of accounting for income taxes is to recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred. A result is to recognize both the current and the deferred tax consequences of the operations of a reporting period. (Spiceland, Nelson, & Thomas, 2018, p. 943) Temporary differences arise when tax rules and accounting rules recognize income in different periods. (Spiceland, Nelson, & Thomas, 2018, p. 909)

Under APB Opinion No. 11, Accounting for Income Taxes, the term “timing differences” is used to describe the differences between the years in which transactions affect taxable income and the years in which those same transactions are recognized in financial accounting income. These differences are collectively referred to as “temporary differences” in FAS 109 (Mecimore).

There are two types of differences: temporary difference and permanent difference.

Temporary difference is the difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis which will “reserve” in later years (Spiceland, Nelson, & Thomas, 2018, p. 909).

Permanent difference is the difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis that will not “reverse” resulting from transactions and events that under existing tax law will never affect taxable income or taxes payable (Spiceland, Nelson, & Thomas, 2018, p. 923). In our case, $50,000 insurance premium the company pays annually for the CEO’s life insurance policy is the expense that is prohibited as tax deductible. However, permanent difference is not considered either for current tax payable or for deferred tax liability for book-tax differences because permanent differences are not temporary.

Even though the company treasurer, Randy Patey, believes that as a result of pending legislation, the current 40% income tax rate will be decreased for 2019 to 35%, the tax rate that will be applied for the taxable amount in our company would be the current tax rate of 40%.

In our company the building which was purchased on January 1, 2017 for $6,000,000 with the building’s estimated life of 30 years and no salvage value. As a result, the building’s tax basis is $5,200,000. The carrying value of the building would be $5,600,000 followed by depreciation of $200,000 per year.

The tax basis valuation of the building using MACRS method of depreciation is $5,200,000 and the financial accounting using straight method of depreciation is $5,600,000. The difference ($5,600,000 – $5,200,000) would cause a temporary difference of $400,000. The deferred tax liability applying the present rate of 40% is $160,000.

If you have any questions or need additional information, please feel free to revert for contact me.

Yours sincerely,

Yaedam Shin

References

Mecimore, C. D., & Mecimore, C. D., Jr. (2010). Accounting for income taxes. In Bank Accounting and Auditing Service (Vol. 1, p. FAS-36(3)). Austin, TX: Sheshunoff. Retrieved from http://bi.galegroup.com.ezproxy.liberty.edu/global/article/GALE%7CA238558015?u=vic_liberty&sid=summon

Spiceland, J. D., Nelson, M., & Thomas, W. (2018). Intermediate accounting. Ninth edition.:            McGraw-Hill Education.

11 hours ago 

Kristen Sullivan 

RE: Judgment Case 16-9 

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           Kristen Sullivan

Acct 302 – D02 LUO

Discussion Board 3: Group 3

August 1, 2018

Judgment Case 16-9:  Analyzing the effect of deferred tax liabilities

           When compiling a company’s year-end financial statements, management must ensure the statements represent an accurate report of the company’s financial state.  Any material effects not included in the financial reports warrant explanation in the disclosure notes.  The sole effort is to provide investors and analysts with not only an accurate current financial “snapshot”, but also a better understanding of future expenses, capital investments, purchases, and business endeavors.

           One area of particular interest to investors is liabilities.  As stated in Intermediate Accounting, “Managers and outsiders are aware that increasing debt increases risk” (Spiceland, et al, p. 940).  Investors and creditors seek confidence that a company has the ability to pay their debts when they become due.  In fact, “failure to properly consider risk . . . is one of the most costly, yet one of the most common mistakes investors and creditors can make.  Long-term debt is one of the first places decision makers should look when trying to get a handle on risk” (Spiceland, et al, p. 789).  

A common ratio (used in accounting practice) to assess the risk a company carries is the debt to equity ratio.  It is computed by dividing total liabilities by shareholders’ equity.  “The higher the debt to equity ratio, the higher the risk.  The type of risk this ratio measures is called default risk because it presumably indicates the likelihood a company will default on its obligations” (Spiceland, et al, p. 789).

Building on the concept of liabilities (and their associated risks), a particular long term liability comes into question for analysts–the deferred tax liability. 

A deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years.  For example, a temporary difference is created between the reported amount and the tax basis of an installment sale receivable if, for tax purposes, some or all of the gain on the installment sale will be included in the determination of taxable income in future years.  Because amounts received upon recovery of that receivable will be taxable, a deferred tax liability is recognized in the current year for the related taxes payable in future years (FASB, 1992.)

Even though it is a tax to be paid at a later date, it is still a liability.  And, because of its classification, “deferred tax liabilities increase reported debt” (Spiceland, et al, p. 940).  Therefore, they have a direct impact on the debt to equity ratio. 

For the case study in question, Macy’s department store has reported $2,123 in deferred income taxes.  By including this amount in the total liabilities, it yields a debt to equity ratio of 3.84.  If the deferred tax amount is removed, the new debt to equity ratio would be 3.34, a 13% decrease reflecting less risk.

Should the deferred tax liability be included in the computation of this ratio?  Some analysts will argue that it should be excluded, observing that in many cases the deferred tax liability account remains the same or continually grows larger.  Their contention is that no future tax payment will be required” (Spiceland, et al, p. 940).

Under current GAAP, an entity is required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.  Stakeholders have informed FASB that this requirement results in little or no benefit to financial statement users and is costly for financial statement preparers (Tysiac, 2015).  

Although, there is an amendment that “will align the presentation of deferred income tax and liabilities with IFRS, which requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position” (Tysiac, 2015.)

Upon assessing the importance of the financial statements, it would be recommended to Macy’s to present the debt to equity ratio with both circumstances – one accounting for inclusion of deferred taxes and the second without deferred taxes.  Since ratios are used for comparison purposes within a given industry, Macy’s could use either ratio against other retailers depending on how others reported their debt to equity ratio in regards to deferred taxes.  In addition, investors/creditors could benefit from knowing both ratios to better understand the impact that deferred taxes have on the debt to equity ratio.

REFERENCES

FASB, Federal Accounting Standards Board, 1992. Summary of Statement No. 109.  Retrieved from https://www.fasb.org/summary/stsum109.shtml.

Spiceland, J. David, Nelson, Mark W., Thomas, Wayne B., 2018. Intermediate Accounting: Ninth Edition.  McGraw Hill Education. New York, NY. 

Tysiac, Ken. Journal of Accountancy. November 20, 2015.  FASB simplifies presentation of deferred income taxes.  Retrieved from https://www.journalofaccountancy.com/news/2015/nov/deferred-taxes-balance-sheet-201513434.html.

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