Accounting for Income Tax

Future income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Deferred financing costs, included in other assets, are amortized on a straight-line basis over the term of the bank financing. Reitmans accounts for stock-based compensation and other stock-based payments use the fair value based method. Basic earnings per share is determined with the weighted average number of non-voting and common shares outstanding during the period. When calculating diluted earnings per share, the weighted average shares outstanding are increased to include additional shares from the expected exercise of options. The number of additional shares is calculated by assuming that the proceeds from such exercises are used to repurchase non-voting and common shares at the average market price during the reporting period. Deferred licensing revenue is amortized on a straight-line basis. The financial statements and accompanying notes have been prepared on a consolidated basis and reflect the consolidated financial position of Reitmans and its wholly-owned subsidiaries. Merchandise inventories are valued at the lower of cost, determined principally on an average basis using the retail inventory method and net realizable value. Income is recorded on the accrual basis. Capital

25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”

2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?

Accounting is commonly described as the language of business. It is very important for all business owners to have very good understanding of their finances. Having the knowledge of your business finance, you will know where the money is going. Every business owner should have a good understanding of finance. To have a good understanding business owners needs to understand basic accounting steeps, how does accounting play a role in their business, how to define a financial statement and how the omission of any of these steps would affect the success of a business. Once you have an understanding of accounting/finance and the how it plays

According to AASB 112, main principal of tax effect is to recognize deferred tax asset or deferred tax liability if it is probable that future recovery or settlement of asset or liability makes future tax payments larger or smaller. Requirements are to separately disclose main parts of tax expense, aggregate current and deferred tax relating to items recognized directly in equity, information demonstrating a relationship between tax expense & company’s accounting profit, and certain information relevant to temporary differences and deferred tax assets.

* In some business combinations, the acquirer has cumulative losses that caused the acquirer to conclude that a valuation allowance was required on its deferred tax assets (including net operating losses) immediately prior to the acquisition, and the deferred tax liabilities assumed in the business combination are available to offset the reversal of the acquirer’s pre-existing deferred tax assets.

3. On the basis of the responses to Question 1 and 2, what are the units of accounting in this arrangement?

Once a gain or loss is recognized, a taxpayer must determine how the recognized gain or loss affects the taxpayer’s tax liability. The character depends on a combination of two factors: purpose or use of the asset and holding period. The purpose or use of the asset is important because the law does not treat all assets equally. The general use categories are: (1) trade or business, (2) for the production of income (rental activities), (3) investment, and (4) personal. Based on these criteria, we can categorize an asset into one of three groups: (1) ordinary, (2) capital, or (3) section 1231. Characterizing the gain or loss is important because all gains and losses are not equal. Ordinary gains and losses are taxed at ordinary income rates, regardless of the holding

There presents some positive evidence to avoid the recording of valuation allowance. First, Packer, Inc has a profitable operation history from 1995 to 1997, despite a significant loss in 1994. This is agreed by FASB, which states that a “strong earnings history coupled with evidence indicating that the loss (for example, an unusual, infrequent, or extraordinary item) is an aberration rather than a continuing condition” is a piece of positive evidence (FASB 740-10-30-22). These profits may be carried forward into the future to offset net-operating loss. Secondly, Packer may not generate any significant U.S Federal tax net operating loss carry forwards in the near future because it has the ability to utilize tax planning, such as capitalization of R&D. Thirdly, Packer has never lost deferred tax benefits due to expiration of a US net operating loss carry-forwards.

It is critical to understand that the transaction events which give rise to timing differences are economic in nature and therefore have economic consequences. The question then becomes how to best reflect those economic consequences in the financial statements. Inter-period income tax allocation considers the tax consequences of transaction events such as revenue, expenses, gains, and losses and associates these items with the period in which these events are recognized. In other words, inter-period tax allocation is consistent with the basic tenets of accrual accounting. Underlying this method is the understanding that there is a direct economic relationship between identifiable transactions reflected in the financial statements and related income tax effects (Arthur et al., 1984). Therefore, each transaction has a tax effect.

Ultimately, a policy can be equitable and politically feasible, but costs remain key to their successful adoption. Consequently, it is important to consider to economic cost. For cash transfer programs, the most relevant measurements include labor costs, tax incidence, and government expenditures. Together, these categories describe the total cost imposed on the economy as a result of a cash transfer program.

This includes income items that are accelerated for tax purposes due to the use of different processes between book and tax or that results from a certain statutory law. Types of taxable income not recorded on the books would be: gain recognized in the following years on installment sale, tax gain on the disposal of assets in excess of the book gain, prepaid interest or rent that has been collected.

* Comments relating to the adequacy of disclosures, the actual descriptions of rate reconciliation items, deferred tax assets and liabilities, uncertain tax positions, timing of reversals, or expiration of net operating losses in various jurisdictions.

It has been brought to my attention that you would like to change the tax accounting period from April 1st to march 31st, and there are a few things you must be aware of before you decide how to change the accounting period, what accountant methods to use in this change, and how to report net operating loss associated with the change.

Another policy that Thatcher implemented was the use of taxation, she preferred to use indirect taxes rather than taxes on income and she also used VAT. Thatcher’s ultimate goal by doing this policy was to increase GDP, increase employment and keep inflation at bay. The use of taxation had some good effects and some bad effects. In many ways the tax policy introduced led to a use of policy mix and also promised far too much which is why it all went wrong.