You are an auditor of Grove, an accounting firm in San Antonio, Texas. As an auditor, you have been assigned to the engagement of Darden Manufacturing. Recently, Darden has gone through a change in personnel and a new accounting director, Bridget, has been hired to oversee the company’s accounting and financial reporting.
During the audit, you and your team work out of Darden’s headquarters in a room provided by the client. Since Bridget is new to the organization, she has learned a lot about Grove and the entire auditing process. On one particular day, Bridget stopped by your office because of a question your audit team has regarding the company’s income tax expense.
Darden has a depreciation difference between book-to-tax of $28 Million. This $28 Million represents accelerated depreciation expense Darden was able to claim on their current and prior tax returns in advance of recognizing the expense on their financial statements in which they will do over the useful life of the asset.
In their preliminary financial statements, Bridget calculated the related Deferred Tax Liability as follows:
$28 Million x .30 = $8.4 MM. Her journal entry into the financial statements was:
Dr. Income Tax Expense 8,400,000
Cr. Deferred Tax Liability 8,400,000
In working with your tax team at Grove, Pamela, a 3rd-year Tax Associate, mentioned that the enacted tax rate for the current year and the years that follow is 24%. Your audit staff believes the journal entry should be as follows:
Dr. Income Tax Expense 6,720,000
Cr. Deferred Tax Liability 6,720,000
Because you believe you are correct, you have asked Bridget to clarify her stance on her journal entry. During Bridget’s visit to your office, Bridget is confused because at her tax for accounting director’s training class the instructor mentioned that the expected tax rate in the next few years was going to increase due to the ballooning federal debt and the instructor expects that the tax rate for corporations to be 30%.
You believe this is a measurement issue.
Who is correct in this situation, Bridget or your audit staff and why? What accounting standards codification are you relying on for in reviewing this tax situation? (You must cite the accounting standards codification and list the reasons why one is correct versus another).
2.As a manager at Sage Accounting, Becky and yourself are assigned to an engagement related to the audit of Fine Co’s financial statements. Becky is a manger as well at Sage Accounting. Your senior has sent Becky and you an income tax workpaper that your team has prepared as they audited the tax expense and the related deferred tax asset/liability.
Becky calls you a few hours after receiving the workpaper wanting to discuss the presentation of the DTL and DTA on the financial statement. In the workpaper the client has reported the DTA and DTL as a current asset and current liabilities section of the financial statement. The senior on the engagement had requested an inquiry of the client on why the DTA and DTL was presented as a current asset/liability.
The response from the client was as follows:
“The company’s DTA was paid during the current year and the company expects to reverse out the DTA in the upcoming year.”
Becky believes this is the wrong call and it should not be presented in current assets no matter what.
According to the Accounting Standards Codification, what should the DTA and DTL be classified and what is the ASC reference for the treatment of DTA and DTL? Based on your research in ASC, why does it make sense to treated DTA and DTLs as noted in the ASC? (You must cite the reference numbers in ASC.)
3.According to the Accounting Standards Codification, when a DTA and DTL are recognized in an entity’s financial statement, what needs to be disclosed related to the DTL and DTA recognized in the entity’s income statement and where would you refer someone in the Accounting Standards Codification to find this requirement?
4.You are advising a client who runs a Common Interest Realty Association (Home Owner’s Association). The client is not familiar with the tax presentation of the HOA’s financial statement and has asked you for a little bit of assistance.
The client heard from another person that runs an HOA that there are additional disclosures that are required in the association’s financial statements related to income taxes. The client is asking for your assistance as you specialize in realty type organizations.
What are the additional disclosures a Common Interest Realty Association and what ASC citation would you pass along to your client should he want to investigate the answer for himself
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