11 Jun WHAT EFFECT (ADJUSTMENTS), IF ANY, DOES ECONNECT’S DECISION TO PARTICIPATE IN THE TAX AMNESTY PROGRAM HAVE ON THE AMOUNT RECOGNIZED AS OF MARCH 31, 2012?
eConnect–Pays Up or Not?
eConnect, an online retailer, fulfills its online orders by shipping its products directly to customers in all 50 states. eConnect does not have a brick-and-mortar store presence in any state, but does operate distribution centers in various states across the country, including State X. Consistent with its practice in all 50 states, eConnect does not collect or remit sales tax to State X.
In court rulings in 2005, State X had taken the position that operating a distribution center within a state constitutes nexus and thus would subject that company to collect and remit sales tax on all sales within that state.
As of December 31, 2011, eConnect has operated its distribution center in State X for five years and has never collected or remitted sales tax to State X. Although the company considers the risk of detection to not be probable, eConnect has estimated the total amount of sales tax payable to the state for the past five years to be $50 million plus $6 million in interest and $4 million in penalties.
On March 15, 2012, Mr. Needmoney, the governor of State X, established a tax amnesty program. The program provides that any unregistered taxpayer who voluntarily registers to collect sales tax on a prospective basis will be forgiven (1) 50 percent of all unpaid sales tax and (2) all interest and penalties on unpaid taxes. eConnect management decides to take advantage of this program.
On June 15, 2012, eConnect completes the necessary paperwork and other actions to participate in the program and pays State X $25 million to settle its obligation through December 31, 2011.
Total score for this case: 10 points.
Applicable Professional Pronouncements:
ASC 405-20
ASC 410-20
ASC 450
FASB Concepts Statement 6 (CON6)
FASB access for research and study:
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Note: when you refer to the pronouncements as supports of your opinion, please give a clear reference to the detailed coding of your quoting paragraph such as “ASC 405-20-12-2 states”.
Objective of this case:
To apply the key concepts of derecognizing a liability and to distinguish the difference between a contractual or legal liability and a contingency.
Instructions/requirements/grading policies:
As of December 31, 2011, what amount, if any, of sales taxes due should be recognized in eConnect’s financial statements? (2.5 points)
1) Please provide a direct answer to the question (i.e., there is $xxx of sales taxes should be recognized as of Dec 31, 2011, or there isn’t any taxes due need to be recognized as of Dec 31, 2011). 1 point.
2) Please explain the reasons behind your conclusion and provide supports to your conclusion by using references from the FASB pronouncements listed above. You need to provide at least 3 references. Please note that “references from the FASB” includes basically two parts: 1) direct quotation of the original wordings from FASB pronouncement, and 2) your argument/explanation why and how the quotation supports your opinion, in another word, how it is relevant to this case.
1.5 points in total for this part, of which 0.5 point for references, 1 point for the logics presented in your argument. Please note that if you provide wrong answer to the first question, you lose the entire 2.5 points of this question.
Should eConnect restate financial statements prior to 2011 and why? (2.5 points)
1) Direct answer to the question (i.e., yes or no). 1points.
2) Explain how you come to your conclusion. You may not need the pronouncements listed above, however, you may want to point out other appropriate FASB rulings regarding financial statement restatements. Direct quotation from FASB document is optional. Total 1.5 point. (Note that if your conclusion is wrong then you lose the whole 2.5 points for this question.)
What effect (adjustments), if any, does eConnect’s decision to participate in the tax amnesty program have on the amount recognized as of March 31, 2012? (2.5 points.)
1) Direct answer to whether there should be any effect, and/or adjustments, and if yes, what kind of effect. 1 point.
2) Your argument/reasoning of your opinion stated above. 1 point.
3) At least one reference from the listed pronouncements to support your opinion. 0.5 points.
What amounts, if any, should be recognized in the financial statements associatewith the $25 million payment on June 15, 2012? (2.5 points)
1) Please provide the correct amount you believe that is subject to recognition. 1 point.
2) Please provide journal entry for this recognition. 1 point.
3) Please briefly explain how you come to this amount and the adjusting entry. 0.5 points.
4) You are not required to quote from FASB pronouncements.
There’s requirement for explanation of your opinion in each question above. If there’s requirement for references from FASB pronouncements, please make sure that you quote the original language using a quotation mark, with clear reference for the quotation. The quotation should be accurate and relevant to your argument. Your reasoning should be relevant, logical, and concise.
Case due at 11pm on Wednesday, August 10th, 2016. Please submit a word document electronically vie email. Only one copy for each group, please. In the submission email please clearly state class code (ACCT301A), your group #, and list of group members’ name. Late submission is not acceptable and will result in zero score.
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