1
Date: XX,XX,XXXX
Subject: Accounting for Deferred Taxes of Duncan Corporation
Executive Summary
Duncan Corporation (“Duncan” or “the Company” or “the tax payer”) is an internet–
based retailer which delivers products to customer directly by distribution center including
State of Virginia. However, at the time of expense incurred, Duncan Corporation has not
been recorded with sales taxes expenses because did not collected and remitted sales tax on
all taxes within State of Virginia. For this matter, the appropriate accounting treatment for the
sales taxes payable that Duncan did not reflect in its accounting, and the amount to be
deducted and paid, will be an issue.
ASC 340-40-25-08 defines the recognition of costs as expense in entity when that
costs are related to satisfied performance obligation to customer under accrual basis.
Regarding of this, sales tax payable is identified as expense in December 31, 2017 and deduct
sales taxes payable by settlement of its obligation on June 15, 2018, but in March 15, 2018,
there would be no journal entry related to sales tax payable because decision to take
advantage of Virginia tax amnesty program does not affect. However, this treatment results
an underestimation of net income in 2017 due to recognition of past five-year sales taxes at
the same time in 2017. Therefore, to avoid distorting profit or loss, sales taxes at the
identified five-year period excluding those incurred in 2017 should be record as a deduction
from Retained Earnings.
Analysis
This is an issue concerning the accounting reflection on unpaid sales taxes (“Sales
taxes payable”) that Duncan did not report for the previous five years. That is, if the company
had accounted for the sales taxes payable appropriately, it should have been reflected in the
expenses (sales taxes) paid over the previous five years, but Duncan Corporation has not
reflected them in the past. Duncan found taxes payable late and ended with a $25 million
reduction in taxes payable and in interest payments and penalties as a result of using the
Virginia tax amnesty program. If so, when should Duncan’s tax ($25 million) reflect the cost
will also be an accounting issue. In other words, the appropriate accounting treatment for the
sales taxes payable and the amount to be deducted and paid will be an issue. Regarding to
this, accounting treatment can be reported in journal entry as:
December 31, 2017
Sales taxes expense $50,000,000
Interest expense $6,000,000
Penalty losses $4,000,000
Sales taxes payable $50,000,000
