You have been hired as a consultant to advise on how to present
the tax differences between books and tax returns on the balance sheet of RFH company.
There are a few questionable items which the current controller Mary Sims is
confused as to proper presentation. The timing differences are
1) $1,5000,000 as a result of depreciation timing difference
(books S-L versus MACRS tax return).
2) There also was a bad debt reserve increase from the prior
year of $250,000.
RFH Company is a manufacturing company who accrued $300,000
in warranty liability at year-end and could not deduct it on the tax return for
this year but warranty will be paid out in the following year. A lawsuit in the
amount of $450,000 was accrued on the books at year-end awaiting the final
legal court judgment. Prior court cases have ruled that this $500,000 can be
paid evenly over 3 years. You have to write a memo to Mary Sims advising her
how to classify these temporary tax differences on her books at year-end. In
your memo give FASB sources for her that validates your balance sheet