Case 09-9: Bricks and Mortar Essay

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Case 09-9 Bricks & Mortar Background Bricks & Mortar Co. (The Company) an SEC registrant, is a manufacturer of construction equipment. The Company has been in business for more than 50 years and operating profitably for the past 25 years. In addition, the company has an applicable tax rate of 40% and no unused tax loss or credit carryforwards. The Company’s fiscal year ends on December 31. Relevant Issue This case provides an opportunity to use accounting authority to account for the two issues in the case. Under issue 1 we must determine the adjustment required to the Company’s preliminary 2009 financial statements to comply with ASC 740-10 by completing the table that was provided and justify our…show more content…
Issue 1 facts: As a result of implementing a certain tax strategy, the Company has included a $100 deduction in its draft tax return, resulting in a $40 reduction to taxes payable. There is uncertainty over whether the tax strategy is sustainable under the tax law and therefore over whether the additional $100 is deductible for tax purposes. Management thinks that there is a 40% chance that the tax position would be sustained if taken to the court of last resort. However, on the basis of its past experience in negotiating settlements with the taxing authority, management believes that if it were to negotiate a settlement with the taxing authority rather than take the dispute to court, it would have an 80% cumulative probability of realizing at least $40 of benefit, 40% chance of realizing $20, 30% chance of realizing $10, and only 20% chance of realizing no benefit. The sustainability of this tax position does not affect the tax bases of the Company’s assets or liabilities. Issue 1 facts, One year later: We assume the same facts as issue 1 facts but one year has pasted and the Company is preparing its financial statements for the year ended December 31, 2010.

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