Sarah Keene, CPA, is the newly hired controller for Plexicon, Inc., which is a publicly traded corporation. Ms. Keene's first job with Plexicon 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 Plexicon to realize a sizable deferred tax liability on its balance sheet. As a result, Plexicon paid very little in income taxes at that time.\\n\\n Keene also discovered that Plexicon 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 Plexicon to "defer" all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Keene checked with the legal department and found the policy to be legal, but she's uncomfortable with the ethics of it.\\n\\nRequired:\\n\\nWhy would Plexicon have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?\\nDoes this practice pose an ethical dilemma? If it does, describe the dilemma. If not, why not?\\nWhat position, department or outside parties would be affected by Plexicon's ability to "defer" income taxes payable for several years, despite positive earnings?\\nIf you were Sarah Keene, CPA, what would you say to the management of Plexicon?\\n(Optional) Are there any citations in the FASB Codifications that could support your position?
Sarah Keene, CPA, is the newly hired controller for Plexicon, Inc., which is a publicly traded corporation. Ms. Keene's first job with Plexicon 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 Plexicon to realize a sizable deferred tax liability on its balance sheet. As a result, Plexicon paid very little in income taxes at that time.\\n\\n Keene also discovered that Plexicon 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 Plexicon to "defer" all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Keene checked with the legal department and found the policy to be legal, but she's uncomfortable with the ethics of it.\\n\\nRequired:\\n\\nWhy would Plexicon have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?\\nDoes this practice pose an ethical dilemma? If it does, describe the dilemma. If not, why not?\\nWhat position, department or outside parties would be affected by Plexicon's ability to "defer" income taxes payable for several years, despite positive earnings?\\nIf you were Sarah Keene, CPA, what would you say to the management of Plexicon?\\n(Optional) Are there any citations in the FASB Codifications that could support your position?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Sarah Keene, CPA, is the newly hired controller for Plexicon, Inc., which is a publicly traded
corporation. Ms. Keene's first job with Plexicon 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 Plexicon to realize a sizable deferred tax
liability on its balance sheet. As a result, Plexicon paid very little in income taxes at that
time.\\n\\n Keene also discovered that Plexicon 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 Plexicon to "defer" all income taxes payable for
several years, even though it always has reported positive earnings and an increasing EPS.
Keene checked with the legal department and found the policy to be legal, but she's
uncomfortable with the ethics of it.\\n\\nRequired:\\n\\nWhy would Plexicon have an explicit
policy of selling plant assets before the temporary differences reversed in the deferred tax
liability account?\\nDoes this practice pose an ethical dilemma? If it does, describe the
dilemma. If not, why not?\\nWhat position, department or outside parties would be affected
by Plexicon's ability to "defer" income taxes payable for several years, despite positive
earnings?\\nIf you were Sarah Keene, CPA, what would you say to the management of
Plexicon?\\n(Optional) Are there any citations in the FASB Codifications that could support
your position?
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