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1. What are the components of Income tax expenses?
2. Explain the reason why the tax laws promote a more accelerated depreciation than what is typically used for financial reporting purposes? Are there social and/or economic reasons for this difference?
3. Explain how these liabilities (and/or deferred tax assets) affected by changes in tax rates? How would a company address such a change?
Explanation & Answer
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Per ASC320, Investments in Debt Securities is classified as;
1. Held-maturity security where the organizations have the ability and intentions to hold until
it matures.
2. In absence of intent or ability to hold until maturity, there can be
A) Available for sales security
B) Trading activity.
On the Beresford’s proposal, the effect will be
1. The security with increased value during the period is classified as trading securities so
that the earning will have the rise of fair values over the initial costs.
2. The securities with reduced value are classified as the held to maturity as they measured at the
amortized values and there is no recognition of the temporary fair values over the initial values.
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It will be recognized only when the decline in value is not temporary and they are impairment
losses.
If the reduction in the fair value over the initial value was temporary, there would be no effect on
the earnings. Therefore, Beresford’s proposal would have effect of an increased earning.
Referring Nielson's proposal, effect would be:-
1. The ones with increased value are held to maturity
2. Debt securities with decreased values are trading securities
Therefore the proposal of Nielson will have desired effects of reducing the earning due to the
reduction in the fair values of the debt portfolios.
(b) In both c...
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