Chapter 12 - Solution Manual

6 tax allocation presumes implicit forecasts of

Info icon This preview shows pages 8–9. Sign up to view the full content.

View Full Document Right Arrow Icon
6. Tax allocation presumes implicit forecasts of future profits, a practice which is inconsistent with conservatism. 7. Deferred tax liabilities do not meet the definition of a liability. There is no present obligation to the future taxes reported as deferred tax liabilities. There is no prior transaction because there is no legal liability until an actual tax return is filed. 8. The cost of doing interperiod tax allocation exceeds the benefits, if any, derived. b. Proponents of partial allocation of income taxes propose that interperiod tax allocation is appropriate for items that will reverse, but not for others. They cite the following arguments to defend their position. 1. Many temporary differences are not like items such as accounts payable. Accounts payable “roll over” as the result of individual transactions each of which is individually paid. Because income tax is based on total taxable income, consideration of the effects of groups of items is appropriate. 2. Comprehensive income tax allocation distorts economic reality. For many items there is no “roll over” because the tax rules persist, and the company continues to repeat the same economic transactions (e.g., purchase fixed assets). Thus, consideration should be give to the impact of the future, as well as to historical transactions. 3. Partial allocation enhances assessments of future cash flows. The deferred taxes reported would be more reflective of expected cash flow. 4. Comprehensive allocation is a rigid mechanical approach, which inherently results in the distortion of economic reality. c. Proponents of comprehensive allocation of income taxes argue that all temporary differences have future tax consequences and those tax consequences should be reported in the balance sheet as assets and liabilities. No allocation or partial allocation distorts the presenting of the economic facts because neither approach matches the items reported in the income statement with their tax cash flow effects. The following arguments support this position. 1. Individual temporary differences do reverse. They are temporary, not permanent. Thus, the focus should be on individual items not on groups of items. 2. Accounting is historical. It is inappropriate to offset the income tax effects of possible future transactions against the tax effects of transactions that have already occurred. 3. Temporary differences result in future tax consequences. Hence, the expected tax effects should be reported in the same period as the related transactions and events in pretax financial accounting income. 4. Accounting should not be subjected to manipulation. Management should not be allowed to affect (bias) results by selecting which tax effects resulting from temporary differences should be recorded and which should not.
Image of page 8

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern