Question

Henrietta Aguirre, CGA, is the newly hired director of corporate taxation for Mesa Incorporated, which is a publicly traded corporation. Aguirre's first job with Mesa was to review the company's accounting practices for future income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Mesa to recognize a sizeable future tax liability on its balance sheet. As a result, Mesa did not have to report current income tax expenses. Aguirre also discovered that Mesa had an explicit policy of selling off plant and equipment assets before they reversed in the future tax liability account. This policy, together with the rapid expansion of Mesa's capital asset base, allowed Mesa to defer all income taxes payable for several years, at the same time as it reported positive earnings and an increasing EPS. Aguirre checked with the legal department and found the policy to be legal, but she is uncomfortable with the ethics of it.
Instructions
(a) Why would Mesa have an explicit policy of selling assets before they reversed in the future tax liability account?
(b) What are the ethical implications of Mesa's deferral of income taxes?
(c) Who could be harmed by Mesa's ability to defer income taxes payable for several years, despite positive earnings?
(d) In a situation such as this, what might be Aguirre's professional responsibilities?


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  • CreatedAugust 23, 2015
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