This assessment will give the opportunity to understand the differences between tax and financial income and the impact it has on the financial statements.

Spear Inc is a private corporation that is owned by Michael Spear. The company has been very successful in the last few years and Mr. Spear believes that if the company continues to do well, it will go public. It is his desire to make the company a public company. There are no reasons that Mr. Spear or management are aware of that would hinder Spear Inc.'s ability to be very profitable in the short and long term.

Vicki Wartzman is the controller of the company and is an experienced accountant. She plans for the company to use the MACRS method of depreciating assets and using the installment sales method of recognizing income for tax purposes. Straight-line depreciation will be used for financial statement preparation and all sales will be completely recognized in the year of the sale. There are no other differences between book and taxable income.

Mr. Spear has hired you and your firm to prepare its current year financial statements. As you are preparing the income statement, Ms. Wartzman mentions that she wants to show, as income tax expense, the amount of the tax liability actually due. She points out believes it would better represent the amount of tax the company will actually pay. She also states that if they company continues to be successful, it is not unlikely that the temporary differences will ever reverse.

Draft a memo to the controller outlining your reaction to the plan. Give reasons in support of your decision.

Answer rating: 100% (QA)

Dear Ms Wartzman Please refer to accounting standards IAS 12 Income Taxes It says there that ... View the full answer