IM_CH_15 - Chapter 15: Income Taxes and Financial...

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Chapter 15: Income Taxes and Financial Accounting Instructor’s Manual 7 th edition Page 1 of 15 C HAPTER H IGHLIGHTS Students should come away from this chapter with an appreciation of the complexities bearing upon financial accounting stemming from the federal government’s role in the taxation process and fiscal policy. It should also be clear that income tax allocation presents extremely difficult problems of allocation. A viable means of viewing the income tax allocation problem is by means of comparing and contrasting the numerous positions on the question. Exhibit 14-6 can be used as a frame of reference for evaluating the various positions. The question of the deferred credit position of APB Opinion No. 11 and the definition of liabilities in SFAC No. 6 could be a fruitful approach. A full view of the complexities of income tax allocation can be gleaned from the discussion using the example of accelerated tax depreciation versus straight-line for financial reporting. The heart of the chapter will probably be on how SFAS No. 109 works and its changes from its predecessor, SFAS No. 96. The change relative to the recognition of tax-loss carryforwards is also discussed. The discounting of deferred tax liabilities is also discussed and illustrated. The investment tax credit, now on the internet, is largely of historical interest at the present time. Some comparisons can be made between investment tax credit and income tax allocation approaches. For example, the net-of-tax approach to income tax allocation and the reduction of asset cost approach for the investment tax credit have the similarity of reducing the cost of the asset. The investment tax credit was previously repealed two times, but it always seems to come back because it is a good macroeconomic tool for stimulating economic investment. Q UESTIONS Q-1 As a type of allocation, why is income tax allocation unique? As Thomas has said, “. . . tax allocation may be perceived as an attempt to make allocation consistent, and its allocation problems are the consequences of other arbitrary allocations.” In other words, using different depreciation methods (an allocation) for tax and financial reporting purposes in turn leads to income tax allocation.
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Chapter 15: Income Taxes and Financial Accounting Instructor’s Manual 7 th edition Page 2 of 15 Q-2 Relative to depreciation, why is comprehensive allocation an example of rigid uniformity and partial allocation an example of finite uniformity? Comprehensive allocation is rigid because it unconditionally requires allocation as long as a timing difference exists. Partial allocation is finite because it requires allocation only if there is a perceived real payback (as measured by several of the deferred tax liability accounts) of accelerated tax benefits. Q-3
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IM_CH_15 - Chapter 15: Income Taxes and Financial...

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