Case 4 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 presentation. i gathered the information below for this case and i need help after you read it .

We investigate why temporary book-tax difference appear to serve as a useful signal of earnings

persistence (Hanlon 2005). We first test and show that temporary book-tax differences provide

incremental information over the magnitude of accruals for the persistence of earnings and accruals. We

then opine that there are multiple potential sources of large positive book-tax differences. We predict and

find that firms with large positive book-tax differences likely arising from upward earnings management

(tax avoidance) exhibit lower (higher) earnings and accruals persistence than do other firms with large

positive book-tax differences. Finally, we find significant variation in current-period earnings and

accruals response coefficients and insignificant hedge returns in period , consistent with investors

being able to look through to the source.

This study investigates whether the tax-specific industry expertise of the external audit firm influences its

clients level of tax avoidance. The results suggest that clients purchasing tax services from their external

audit firm engage in greater tax avoidance when their external audit is a tax expert. Because the external

audit firm potentially influences clients tax avoidance activities via the provision of tax consulting

services and the financial statement audit, we also examine whether the overall expertise (i.e., the

combined tax and audit expertise) of the external audit firm is associated with tax avoidance. We find

that the external audit firms overall experts are able to combine their audit and tax expertise to develop

tax strategies that benefit clients from both a tax and financial statement perspective. In combination, our

results suggest that the tax-specific industry expertise of the external audit firm plays a significant role in

its clients tax avoidance.

We contend that tax-related information, which has not yet been considered by extent research, can

significantly improve bankruptcy prediction. We investigate the association between abnormal changes

in book-tax differences (BTDs) and bankruptcy using a hazard model and out-of-sample testing as in

(Shumway 2001). We find that information regarding abnormal changes in BTDs significantly increases

our ability to ex ante identify firms that have an increased likelihood of going bankrupt in the coming

five year period. The information provided by BTDs significantly adds information to traditional

models for predicting bankruptcy, such as that proposed by (Ohlson1980), and also expands the

prediction window beyond the traditional two- year time frame.

This study provides insight into why large positive book-tax differences serve as a bus signal of future

earnings and accruals persistence. Our findings suggest that in some ca positive book-tax differences do

reflect discretion in the accrual process that leads to lower earnings and accruals persistence. For this

reason, on average, large positive book-tax differences are a useful signal of earnings quality. However,

we provide evidence that the usefulness of this signal is contingent upon the predominant source of the

book-tax difference in cases where large positive book-tax differences arise primarily from tax reporting

strategies the persistence of accruals is significantly greater than that of other firms with large positive

book-tax differences. In contrast, when large positive book-tax differences are generated primarily by

upward earnings management the persistence of earnings and accruals is significantly less than that of

other large positive book-tax difference firms. Furthermore, lower overall earnings and accrual

l persistence of large positive book-tax difference firms is the result of the relatively high number of high

accrual firms (26%) within this group.

After removing high discretionary accrued find lower persistence of earnings and accruals for this group

as compared to the firms in small book tax difference group. Recent debate by policy makers has

centered on the issue of improving disclosures of differences in book income and taxable income. In the

wake of several prominent accounting scandals, Senator Charles Grassley sent a letter to President Bush

on October 7, 2002 asking the 31 administration to consider whether action was warranted to improve

disclosures of book-tax differences. McGill and Outlay (2004) provide a detailed analysis of identified

corporate tax shelter participants and show that their tax footnote disclosures provide little information

on these transactions. However, despite concerns over the limited information provided to investor

regarding differences between a firms book and taxable income we find investors are able to us these

disclosures to look through to the source of book-tax differences and correctly price the persistence of

accruals. This result compliments the findings of Ayers, LaPlante, and McGuire (2010) who show that

credit analysts also appear able to look through to the source of book-tax differences in assessing credit-

worthiness. Together these results suggest financial statement users are fairly sophisticated in their ability

to understand the implications of different types of book-tax differences.

required : Organize and interpret the findings of your research in two to three pages (12-point font, double-spaced).