Suzanne is incorrect in thinking that her behavior is justified because she did not receive the full two-week bonus. In fact, this behavior would not be justified even if she had a legitimate claim against the company. If she had a claim or grievance against the firm, then it should be handled by other procedural or legal means. Activity 10–2 Cara’s interpretation of the pension issue is correct. The employee earns the pen-sion during the working years. The pension is part of the employee’s compensa-tion that is deferred until retirement. Thus, Tidal should record an expense equal to the amount of pension benefit earned by the employee for the period. This gives rise to the rather complex issue of estimating the amount of the pension expense. Jose indicates that the complexity of this calculation makes determin-ing the annual pension expense impossible. This is not so. There are a number of mathematical and statistical approaches (termed “actuarial” approaches) that can reliably estimate the amount of benefits earned by the workforce for a given year. As a side note, Jose’s perspective can be summarized as “pay as you go.” In his interpretation, there is no expense until a pension is paid to the retiree. Failing to account for pension promises when they are earned is not considered sound ac-counting.
582Activity 10–3 The CEO may have requested the two changes because they would reduce the amount of depreciation expense and increase the amount of reported earnings recorded in a particular year. Thus, the CEO’s bonus would be higher due to the larger reported earnings. Straight-line depreciation recognizes lower depreciation expense in the earlier years of a truck’s life. As long as the company is replacing trucks, straight-line depreciation will result in a lower depreciation expense and hence a higher income number. Adding 50% to the useful lives of trucks (such as increasing the life from six to nine years) would spread the recognition of depre-ciation expense over a longer life. Thus, depreciation expense would be lower and income higher in any particular year. The CEO may request a change from one generally accepted accounting principle to another. Changing from double-declining-balance to straight-line depreciation is such a change. Though the CEO may be suggesting the change in order to in-fluence the bonus, the change is acceptable, if Sheile Trucking Company’s audi-tors agree with the change. The increase in the useful lives of the trucks is an-other matter. The useful lives of trucks should be based on objective analysis. An arbitrary increase in useful lives for all the trucks cannot be supported. Such a change could be viewed as a violation of generally accepted accounting princi-ples.
583Activity 10–4 a. The so-called “underground economy” hides transactions from IRS scrutiny by conducting business with cash (not check or credit card, which leaves an audit trail). The intent in many such transactions is to evade income tax ille-gally. However, just because a transaction is in cash does not exempt it from
- Summer '11
- ........., Income tax in the United States