Prepare a Letter (Accounting)

The instructions are given in the PDF.

Handout 7
Yukon, Inc. is a publicly-traded company with a December 31 year-end. Yukon operates an online retail
business that fulfills online orders by shipping products directly to customers through a distribution center that
has been located in State Z for the last ten years. This is the only physical presence that Yukon has in State Z.
As a result, Yukon does not collect or remit sales tax on sales made to residents of State Z. The distribution
center is vital to Yukon because State Z borders eight other states and, therefore, is a central location for Yukon
to reach its customers. Yukon would like to construct a second distribution center at the other end of State Z.
Such a facility would reduce its delivery costs in the future by millions of dollars.
State Z has denied Yukon a permit to build the distribution center until Yukon pays prior sales taxes totaling $30
million, $2 million in interest, and $3 million in penalties. Yukon’s legal position has always been that it does not
do business in State Z and is not subject to its laws. And State Z’s legal position has always been that the
distribution center constitutes a presence in the state subjecting Yukon to its laws as a corporation doing
business in State Z.
The year 2023 has ended and the financial statements take approximately two months to prepare and distribute,
which is estimated to occur on March 1, 2024. In December 2023, State Z’s legislature enacted an amnesty
program that would forgive 50 percent of unpaid sales taxes and all interest and penalties if a company agreed
to collect and remit sales taxes on all future sales made in State Z. In addition, State Z agreed to permit Yukon
to build the second distribution center if they were granted amnesty. In January 2024, Yukon submitted the
required application forms to participate in the amnesty and paid State Z a total of $15 million to settle its
obligation through December 31, 2023.
In a meeting of Yukon’s CEO, CFO, and Amelia Emerson, the Controller and a CPA, to discuss in what
accounting period to include the $15 million sales taxes (they were in agreement as to how), Amelia explained
that the sales taxes might need to be reported in the financial statements for 2023. The CEO disagreed and
argued that the 2023 year was over and proposed to account for the payment in the financial statements for
2024 – the year they were paid. He anticipated higher earnings in 2024, which would easily offset and absorb
this $15 million hit to the income statement. The CEO was concerned that it would result in Yukon having to
report a net loss for 2023. Of course, this would result in the CEO and the other executives not receiving their
bonuses if Yukon fell short of reaching the forecasted earnings.
The CFO offered what she thought could be a possible compromise by asking “why not just disclose the
existence of the amnesty in Yukon’s 2023 financial statements and not account for it until 2024?”
The CEO expressed that this might work, but strongly suggested to Amelia that she needed to do more
research and be absolutely 100% certain before discussing this issue further. The CEO made it very clear that
mere disclosure was the most he would find acceptable. His final comment was “whoever heard of changing the
books after the year has ended?”
Amelia disagreed with both executives, but did not want to argue at the meeting until she could support her
position with absolute certainty. Amelia thinks she knows in which accounting period to include the payment of
the sales taxes, but wants you to provide her with your recommendation. She think it has something to do with
“subsequent events.” Amelia was only recently hired as Controller of Yukon and doesn’t want to upset the CEO
and CFO unnecessarily in case she is wrong. Even though it’s Amelia’s responsibility to decide when to account
for transactions, Amelia is tempted to let the CEO and CFO do whatever they want. However, she also doesn’t
want to become involved with financial statements that violate GAAP.
Required:
You must complete this assignment independently on your own and not work with or collaborate in any way with
any other person, including but not limited to your ACCT 350 classmates. Failure to work alone will constitute
academic dishonesty.
Prepare a letter (not a memo) addressed to Amelia Emerson, Controller, Yukon, Inc., 350 Accounting Avenue,
Northridge, California 91330, advising her about which year to use to account for the sales taxes. You must
support your advice by citing any applicable accounting standards. Do not include a reference page. You must
limit your letter to one page (single spaced with double space between paragraphs) and one-inch margins. Only
submit the one page and nothing else. Create your own letterhead for the accounting firm you represent. The
date should be placed no less than one-half inch below the letterhead (or 1.5 inches from the top of the page).
Remember what we discussed in class about not citing a section 55 in the Codification unless you also cite the
primary source to which it refers. In other words, citing only section 55 isn’t enough.
In addition to analyzing the accounting issue in your letter, include no more than three sentences about any
ethical issue that Amelia faces. You should look at the AICPA Code of Professional Conduct rule on “Integrity
and Objectivity”. Explain to Amelia the one part of this rule she should most consider in her current situation
(e.g., subordination of judgment). But remember (and be careful) that the CEO and CFO may be “secondary
readers” of your letter, and that you are creating a written record on this issue. Please note that it is Certified
Public Accountants (CPAs) like Amelia who are “members” of the AICPA and must uphold the AICPA Code of
Professional Conduct.
You may ignore any “Pending Content” sections for this case only.
Your textbook is not recognized as authoritative sources in accounting research. Therefore, do not use your
textbook as support for your recommendation.
Submission
To submit your letter through Canvas, follow these instructions.
• In the Course Navigation, click the Assignments link.
• Click Handout 7 — Submission.
• Use the “Browse” button to select your document.
• Click the “Submit Assignment”.
Failure to submit an acceptable letter will result in you losing 10 points in ACCT 350.
Additional Information
To access the applicable section of the AICPA Code of Professional Conduct, go to page 30 of
https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf
[Copy and paste this web address in your browser.]
To cite this rule, use the following in-text citation:
(AICPA, 2023, ET Section 1.100.001.01)