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 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.

Solution

ASC 740-10-55-3 is the application for tax positions that require a two-step