LAVC Accounting for Sales Taxes Paid out In 2021 to State Z Memorandum
Yukon, Inc. is a publicly-traded company with a September 30 fiscal year-end.
Yukon operates anonline retail business that fulfills online orders by shipping products directly to customers through adistribution center that has been located in State Z for the last ten years.
This is the only physical presencethat Yukon has in State Z. As a result, Yukon does not collect or remit sales tax on sales made to residentsof State Z. The distribution center is vital to Yukon because State Z borders eight other states and, therefore,is a central location for Yukon to reach its customers.
Yukon would like to construct a second distributioncenter at the other end of State Z. Such a facility would reduce its delivery costs in the future by millions ofdollars.State Z has denied Yukon a permit to build the distribution center until Yukon pays prior sales taxes totaling$30 million, $2 million in interest, and $3 million in penalties.
Yukons legal position has always been that itdoes not do business in State Z and is not subject to its laws.
And State Zs legal position has alwaysbeen that the distribution center constitutes a presence in the state subjecting Yukon to its laws as acorporation doing business in State Z.Yukon’s 2021 fiscal year has ended, and the financial statements will take approximately two monthsto prepare and distribute, which is estimated to occur on December 1, 2021.
In September 2021, State Zslegislature enacted an amnesty program that would forgive 50 percent of unpaid sales taxes and allinterest and penalties if a company agreed to collect and remit sales taxes on all future sales made inState Z. In addition, State Z agreed to permit Yukon to build the second distribution center if they weregranted amnesty.
In October 2021, Yukon submitted the required application forms to participate in theamnesty, and paid State Z a total of $15 million to settle all past obligations through September 30, 2021.In a meeting of Yukons CEO, CFO, and Amelia Emerson, the Controller and a CPA, to discuss in whataccounting period to include the payment of the prior sales taxes (they were in agreement as to how),Amelia explained that the sales taxes might need to be reported in the financial statements for fiscal2021.
The CEO disagreed and argued that the 2021 fiscal year was over and proposed to account for thepayment in the financial statements for fiscal 2022 the year they were paid.
He anticipated higherearnings in fiscal 2022, which would easily offset and absorb this $15 million hit to the income statement.
The CEO was concerned that it would result in Yukon having to report a net loss for fiscal 2021. Ofcourse, this would result in the CEO and the other executives not receiving their bonuses because Yukonfell short of reaching the forecasted earnings.
The CFO offered what she thought could be a possible compromise by asking why not just disclose theexistence of the amnesty in Yukons fiscal 2021 financial statements and not account for it until fiscal 2022?
The CEO expressed that this might work, but strongly suggested to Amelia that she needed to do moreresearch and be absolutely 100% certain before discussing this issue further.
The CEO made it very clear thatmere disclosure was the most he would find acceptable. His final comment was whoever heard of changingthe books after the year has ended?
Amelia disagreed with both executives, but did not want to argue at the meeting until she could support herposition with absolute certainty.
Amelia thinks this has something to do with subsequent events and,therefore, knows in which accounting period to recognize the sales taxes.
But Amelia wants you toprovide her with your recommendation and the authoritative GAAP that supports it.
Amelia was onlyrecently hired as the Controller of Yukon and doesnt want to upset the CEO and CFO incase she is wrong.
Even though its Amelias responsibility to decide when to account for transactions,Amelia is tempted to let the CEO and CFO do whatever they want.
However, she also doesnt want tobecome involved with financial statements that violate GAAP.
Required:
Prepare a letter (not a memo) addressed to Amelia Emerson, Controller, Yukon, Inc., 350 AccountingAvenue, Northridge, California 91330, advising her about which year to use to account for the sales taxes.
You must support your advice by citing any applicable accounting standards.
Do not includea reference page. You must limit your letter to one page (single spaced with double space betweenparagraphs) and one-inch margins.
Only submit the one page and nothing else.
Create your own letterheadfor the imaginary accounting firm you represent.
The date should be placed no less than one-half inch belowthe letterhead (or 1.5 inches from the top of the page).
You may submit your letter either as a Word file or pdffile.
In addition to analyzing the accounting issue(s) in your letter, include a brief comment about any ethicalissue that Amelia faces.
You should look at the AICPA Code of Professional Conduct rule onIntegrity and Objectivity.
Briefly explain to Amelia the one part of this rule she should most consider in hercurrent situation (e.g., subordination of judgment).
But remember (and be careful) that the CEO and CFOmay be secondary readers of your letter, and that you are creating a written record on this issue.
Pleasenote that it is Certified Public Accountants (CPAs) like Amelia who are members of the AICPA and mustuphold the AICPA Code of Professional Conduct.
