Kleckner Company started operations in 2007, and although it has grown steadily,
ID: 445289 • Letter: K
Question
Kleckner Company started operations in 2007, and although it has grown steadily, the company reported accumulated operating losses of $530,000 in its first four years in business. In the most recent year (2011), Kleckner appears to have turned the corner and reported modest taxable income of $40,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of the deferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accounting consequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognition of its deferred tax asset.
a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the recognition of deferred tax assets. Include codification references.
b) What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?
c) What are tax-planning strategies?
d) From the information provided, does it appear that Kleckner could employ a tax-planning strategy in evaluating its deferred tax asset?
e) Given its improved performance in 2011 and the information gained from your research, should Kleckner management reduce or eliminate the valuation allowance?
Explanation / Answer
a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the recognition of deferred tax assets. Include codification references.
1) Tax awareness in organizations
2) Following all the rules & regulations of government
3) Automatically it create good image in customer minds
4) No future consequences
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b) What are the sources of income that may be relied upon in assessing realization of a deferred tax asset
Wages, salaries, and tips -- By law, your employer must send you a W-2 that shows how much you were paid in:
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C) What are tax-planning strategies :
Following are the important points that help for Tax Planning Strategies :
DEFERRING INCOME
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d) From the information provided, does it appear that Kleckner could employ a tax-planning strategy in evaluating its deferred tax asset?
Yes Kleckner needs to employ the Tax planning strategy .As there unnecessary funds are blocked in tax.If they implement proper tax planning strategy then there will not be fund block & that can be used as working capital.
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e) Given its improved performance in 2011 and the information gained from your research, should Kleckner management reduce or eliminate the valuation allowance?
AS per the performance of in 2011 & the information gained , its better reduce valuation allowance instead of elimination.
Because if in next year if the performance decreases then again it will affect to company financial structure.So better to reduce the valuation allowance.
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