LAVC Accounting for Sales Tax

Yukon, Inc. is a publicly-traded company with a September 30 fiscal year-end. Yukon operates an
online retail business that fulfills online orders by shipping products directly to customers through a
distribution center that has been located in State Z for the last ten years. This is the only physical presence
that Yukon has in State Z. As a result, Yukon does not collect or remit sales tax on sales made to residents
of 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 distribution
center at the other end of State Z. Such a facility would reduce its delivery costs in the future by millions of
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. Yukon’s legal position has always been that it
does not do business in State Z and is not subject to its laws. And State Z’s legal position has always
been that the distribution center constitutes a presence in the state subjecting Yukon to its laws as a
corporation doing business in State Z.
Yukon’s 2021 fiscal year has ended, and the financial statements will take approximately two months
to prepare and distribute, which is estimated to occur on December 1, 2021. In September 2021, State Z’s
legislature enacted an amnesty program that would forgive 50 percent of unpaid sales taxes and all
interest and penalties if a company agreed to collect and remit sales taxes on all future sales made in
State Z. In addition, State Z agreed to permit Yukon to build the second distribution center if they were
granted amnesty. In October 2021, Yukon submitted the required application forms to participate in the
amnesty, and paid State Z a total of $15 million to settle all past obligations through September 30, 2021.
In a meeting of Yukon’s CEO, CFO, and Amelia Emerson, the Controller and a CPA, to discuss in what
accounting 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 fiscal
2021. The CEO disagreed and argued that the 2021 fiscal year was over and proposed to account for the
payment in the financial statements for fiscal 2022 – the year they were paid. He anticipated higher
earnings 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. Of
course, this would result in the CEO and the other executives not receiving their bonuses because Yukon
fell short of reaching the forecasted earnings.
The CFO offered what she thought could be a possible compromise by asking “why not just disclose the
existence of the amnesty in Yukon’s 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 more
research and be absolutely 100% certain before discussing this issue further. The CEO made it very clear that
mere disclosure was the most he would find acceptable. His final comment was “whoever heard of changing
the books after the year has ended?”
Amelia disagreed with both executives, but did not want to argue at the meeting until she could support her
position 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 to
provide her with your recommendation and the authoritative GAAP that supports it. Amelia was only
recently hired as the Controller of Yukon and doesn’t want to upset the CEO and CFO in
case she is wrong. Even though it’s Amelia’s responsibility to decide when to account for transactions,
Amelia is tempted to let the CEO and CFO do whatever they want. However, she also doesn’t want to
become involved with financial statements that violate GAAP.


Prepare a letter (not a memo) addressed to Amelia Emerson, Controller, Yukon, Inc., 350 Accounting
Avenue, 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 include
a reference page. You must limit your letter to one page (single spaced with double space between
paragraphs) and one-inch margins. Only submit the one page and nothing else. Create your own letterhead
for the imaginary accounting firm you represent. The date should be placed no less than one-half inch below
the letterhead (or 1.5 inches from the top of the page). You may submit your letter either as a Word file or pdf

In addition to analyzing the accounting issue(s) in your letter, include a brief comment about any ethical
issue that Amelia faces. You should look at the AICPA Code of Professional Conduct rule on
“Integrity and Objectivity”. Briefly explain to Amelia the one part of this rule she should most consider in her
current situation (e.g., subordination of judgment). But remember (and be careful) that the CEO and CFO
may be “secondary readers” of your letter, and that you are creating a written record on this issue. Please
note that it is Certified Public Accountants (CPAs) like Amelia who are “members” of the AICPA and must
uphold the AICPA Code of Professional Conduct.

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