Unit 3 DB 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 is

uncomfortable with the ethics of it.

Answer the following questions in the Discussion Board:

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?

c. Who could be harmed by Acme’s ability to “defer” income taxes payable for

several years, despite positive earnings?

d. In a situation such as this, what are Ms. Delaney’s professional responsibilities

as a CPA?

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Accounting for income taxes.

Intermediate accounting (16th ed.). (p. 1107). New York, NY: John Wiley & Sons, Inc.

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