CA19-7 ETHICS / TUTORIALOUTLET DOT COM CA19-7 ETHICS / TUTORIALOUTLET DOT COM

CA19-7 ETHICS
FOR MORE CLASSES VISIT
www.tutorialoutlet.com
CA19-7 ETHICS (Deferred Taxes, Income Effects) Stephanie
Delaney, CPA, is the newly hired director of corporate taxation for
Acme Incorporated, which is a publicly traded corporation. Ms.
Delaney’s first job with Acme was the review of the company’s
accounting practices on deferred income taxes. In doing her review,
she noted differences between tax and book depreciation methods that
permitted Acme to realize a sizable deferred tax liability on its
balance sheet. As a result, Acme paid very little in income taxes at
that time.
Delaney also discovered that Acme has an explicit policy of selling
off plant assets before they reversed in the deferred tax liability
account. This policy, coupled with the rapid expansion of its plant
asset base, allowed Acme to “defer” all income taxes payable for
several years, even though it always has reported positive earnings
and an increasing EPS. Delaney checked with the legal department
and found the policy to be legal, but she’s uncomfortable with the
ethics of it.
Instructions
Answer the following questions.
(a) Why would Acme have an explicit policy of selling plant assets
before the temporary differences reversed in the deferred tax liability
account?
(b) What are the ethical implications of Acme’s “deferral” of income
taxes?