November 18, 2019.
Amelia Emerson, Controller
350 Accounting Avenue
Northridge, CA 91330
Dear Ms. Emerson,
SIS consulting have analyzed your proposed plan to report the $15 million sales tax paid to State Z to settle the firm’s obligation through December 31, 2019 in the year ended December 31, 2020 financial report. The firm suggests that Yukon, Inc. should include the funds in the 2020 financial year report as a liability.
As the company’s CPA, your role is to keep the firm’s assets and liabilities in your balance sheet. The $15 million paid to State Z should be placed as a liability on January 2020. The company should disclose the transactions as tax remittance and include the inventory in its balance sheet, recorded as a liability (FASB, 2016, ASC para 740-10-30-2).
Based on the fact that State Z is Yukon’s central distribution center, the construction of a new distribution center should overrun the liability. State Z will not be using the funds for its operations, but is holding it as a collateral to allow Yukon, Inc. to construct a second distribution center, as such, the transaction must be accounted for as a tax and as a sale. To Yukon, Inc. the transaction will be treated in the financial year 2020 as a liability and not as an earning (FASB, 2016, ASC para. 740-10-30-1). Furthermore, the amnesty funds will not satisfy State Z since the funds will only satisfy its liabilities and not add any benefits to it. This plan is not a sale transaction, and thus, the inventory issued should not be considered as an expense.
Keep in mind the rule of objectivity and integrity in deciding on any of the above suggestions. Ethical issues such as conflict of interest may arise based on your decision due to external and internal pressures (AICPA, 2016, ET Section 1.100.001.01)
SIS Staff Accountant