Accounting MemoTo: Manager
From: Hunter, CPA
Re: Deferred Taxes, Accounting Errors and Changes, Subsidiary
As of May 14, 2012, this memorandum will provide thorough explanations the following questions: the methodology used to determine deferred taxes, the procedures for reporting accounting changes and error corrections, and the rationale behind establishing the subsidiary as a corporation. We will also discuss the professional responsibilities of a CPA, and the difference between a review and an audit.
According to FASB, deferred tax assets or liabilities are recognized for temporary differences that will result in taxable or deductible amounts in future years and for carry forwards. Temporary differences arise when the tax basis of an asset or liability is different from its carrying value on the financial statements.
Accounting Changes and Error
The three main types of accounting changes are as follows:
• Change in Accounting Principle-a change from one accounting principle to another.
• Change in Accounting Estimate- a change that happens when new information or additional experience has been given.
• Change in Reporting Entities- a change from one entity to another.
Although error corrections are not considered as an accounting change, it is still an important asset to use for the financial statements. Errors result from mathematical mishaps, misappropriating accounting principles, or misuse of factual information when preparing a financial statement. (Kieso, Weygandt, & Warfield, 2007).
Subsidiaries for a Corporation
A company can become a subsidiary of another company once it attains fifty percent of the voting stock of that company. From this point, both companies become an affiliated corporation. Some companies own more companies to be able hold their stock within those companies; this approach is called holding companies. If the parent company is given all of the voting stock, the new company will be fully owned by that company. Two...