Chapter 12 - Solution Manual

Finally although we believe that income tax

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Finally, although we believe that income tax allocation provides no benefits, even if it did, in our opinion, the accounting recordkeeping and procedures involving interperiod tax allocation are too costly for the purported benefits. Therefore income tax allocation violates the cost-benefit constraint described in SFAC No. 2 . We oppose any allocation of income tax – comprehensive or partial. With regards to partial income tax allocation, we believe that management may pick and choose those temporary differences to which they wish to apply income tax allocation. Accounting results should not be subject to manipulation by management. That is, a company’s management should not be able to alter the company’s results of operations and ending financial position by arbitrarily deciding which temporary differences will and will not reverse in the future. Team 2: Present arguments favoring partial allocation of income taxes We believe that some temporary differences between accounting income and taxable income will reverse in the future. However, some temporary differences will never reverse because they are continuously replaced by others. Thus, the income tax expense reported in an accounting period should not be affected by those temporary differences that are not expected to reverse in the future. Stated differently, in certain cases, groups of similar transactions or events may continually create new temporary differences in the future that will offset the realization of any taxable or deductible amounts, resulting in an indefinite postponement of deferred tax consequences. In effect, we argue that these types of temporary differences are more like permanent differences. Examples of these types of differences include depreciation for manufacturing companies with large amounts of depreciable assets and installment sales for merchandising companies.
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274 We offer the following arguments to counter the arguments of our nonallocationist opponents. Firstly, income taxes result from the incurrence of transactions and events. If the company incurs taxable revenues, taxable income and thus taxes payable increase. If the company incurs tax deductible expenses, taxable income and thus taxes payable decrease. Without these transactions, there would be no taxable income and no taxes payable. Thus, the amount of income tax expense reported during an accounting period should take into consideration the results of those transactions and events that are included in financial accounting income. However, all groups of temporary differences are not similar to certain other groups of accounting items, such as accounts payable. Accounts payable “roll over” as a result of actual individual credit and payment transactions. Income taxes, however, are based on total taxable income and not on the individual items constituting that income. Therefore, consideration of the impact of the group of temporary differences on income taxes is the appropriate viewpoint.
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