Answer the following Discussion Questions

  1. Despite the voluminous nature of the tax code, there are still questionable areas relating to deductibility of expenses and losses as well as claiming of tax credits. The FASB accounting standards codification indicates when the uncertain tax benefit can be recognized after going through a two-step process.

    A.Discuss the two-step process for recognizing and measuring tax benefit of uncertain tax position.

B.Describe two to three examples of areas where tax may be considered uncertain.

C.What are the differences between treatments of uncertain tax positions under US GAAP and IFRS?

  1. Accounting for pensions receives more attention in the United States than in other countries. Discuss reasons that would explain why pension accounting has less emphasis in many foreign countries than the U.S.

  2. TopNotch Medical, Inc., is a supplier of medical equipment. It recently introduced a new line of equipment that may revolutionize the medical profession. Because of the new technology, potential users of the equipment are reluctant to purchase the equipment, but they are willing to enter into a lease arrangement if they can classify the lease as an operating lease. The new equipment will replace equipment that TopNotch has been selling in the past. Leasing the new equipment will result in losing an estimated 25% in equipment sales.

Some members of management want to structure the leases so that TopNotch, as lessor, can classify the lease as a sales-type lease and thus avoid further reduction of income. Others believe that they should treat the leases as operating leases and minimize the income tax liability in the short term. They are uncertain, however, as to how the financial statements would be affected under these two different approaches. They also are uncertain as to how leases could be structured to permit the lessee to treat the lease as an operating lease and the lessor to treat it as a sales-type lease. As the accountant for TopNotch, explain how TopNotch should record the leases. Be sure to support your rationale.

  1. Airline X depreciates its airplanes over a 15-year period and estimates a salvage value of 10% of the cost of the plane. At the same time, Airline Y depreciates identical airplanes over a 25-year period and estimates a salvage value of 15% of the cost of the plane. As expected, these different assumptions resulted in different operating results. For example, if an airplane costs $ 10 million, Airline X will depreciate $ 260,000 more per year for 15 years than Airline Y.

Which company’s estimate of useful life more closely reflects reality? Will you feel comfortable as a passenger in a 25-year old airplane? Does the fact that Airline Y subsequently went out of business provide any information as to why its estimates were so substantially different from those of financially sound Airline X?

 

  1. John Young is a new assistant controller at Richmond Electronics, a large regional consumer electronics chain. Before John’s recruitment, he was aware of Richmond’s long trend of moderate profitability. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The issue he is facing as he reviews the reports is the decline and erratic trend in cash flows from operations.

    John sketched the following comparison ($ in millions):

    Income from operations
    $ 140.0 (2014)
    $ 132.0 (2013)
    $ 127.5 (2012)
    $ 127.0 (2011)

    Net income
    38.5 (2014)
    35.0 (2013)
    34.5 (2012)
    29.5 (2011)

    Cash flow from operations
    1.6 (2014)
    19.0 (2013)
    14.0 (2012)
    15.5 (2011)

    His sketch shows increasing profits but an ominous trend in cash flow, which is consistently lower than net income. Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:

    A.Richmond loosened its credit policy. In other words, Richmond relaxed its credit terms and lengthened payment periods.

    B.Accounts receivable balances increased dramatically.

    C.Several of the company’s compensation arrangements, including that of the controller and the company president, were based on reported net income.

  2. What is so ominous about the combination of events John sees? If you were John, what course of action will you take?

    6. You are a recently-hired accountant at Greenwood Company, a small corporation that does a seasonal business of selling snow removal equipment, with most of its sales to retailers occurring in the last two quarters of the calendar year. Production is particularly heavy during the second quarter, in preparation for these sales.

  3. In the process of preparing Greenwood Company’s 2015’s first quarter interim report, you noticed and inquired about an account titled Miscellaneous Factory Assets for $140,000. The controller asked you to include it in long-term assets although that was the amount spent on repairs and maintenance during the first quarter. The controller didn’t want to show a loss, which is what would happen if the $140,000 were expensed in quarter 1. Instead, Greenwood would book the expense in the quarter it will have the least effect on net income. The controller argued that it makes no difference, since the company’s total yearly income is the same regardless of the quarter repairs and maintenance expense is reported.

    Respond to the controller’s explanation from financial reporting and ethical perspectives.