Case 09-9: Bricks and Mortar
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.
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 2 facts: The Company has taken a tax deduction in its draft tax return in the amount of $100,
resulting in a $40 reduction to taxes payable. Management has obtained a tax opinion from a law firm at
a 65% level confidence that the tax position is appropriately deductible under the tax law and concluded
that the tax position meets the more-likely-than-not recognition threshold. Management believes
that it would negotiate a settlement with the taxing authority in the event of a dispute. In the event
of a negotiated settlement with the taxing authority, management asserts there is a 35% chance that
it would sustain the full $40 tax benefit, 35% chance that it would sustain $32 tax benefit, and a 30%
chance that it would sustain $24 tax benefit. This tax position does not affect the Company’s tax bases
of its assets or liabilities.
Specific Issues to Resolve
Before we start with the issues of the case we must find out how the two-step process of the
recognition and measure of tax positions are handled. The first step is determining whether a tax
position has met the recognition threshold. The second step is measuring a tax position that meets the
recognition threshold. Then we can decide if the two issues met 740-10-55-3, which is whether or not
the tax position would be recognized.
ASC 740-10-55-3 is the application for tax positions that require a two-step