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Question
1) The Great Bobby T. has come to you with a problem; His Wife, The
Greater Patty T’s birthday is coming and the Great Bobby T. needs
money. Unfortunately, the treasury of Freedonia is a little short. The
Great Bobby T. has come to you as Secretary of the Treasury to develop a
tax system for Freedonia. Your two choices are a VAT tax or an income
tax. Due to its size and population, most of the recent growth in the
economy of Freedonia has been due to exports; first to the United States
and second to Canada and third to the European Union. If you choose a
VAT tax are you going to have an exemption for exports thus placing the
burden on the residents of Freedonia? If you choose an income tax do
you tax: citizens, residents, the source or any combination of the 3?
Also, if you decide to tax income will you give a tax credit, a tax
deduction or nothing for foreign taxes paid? Defend your position.
Its stated that most of the recent growth in economy of Freedonia has been
due to exports:, first to the Unites States, second to Canada and then
European Union. I would not suggest exemption of VAT for exports as
Freedonia is a growing economy and it would be a burden if its exempted.
They could consider implementation of VAT but at a comparatively lower or
an acceptable rate initially. Implementing a significant amount as VAT on
exports in the first place may negatively impact the exports. It’s a growing
economy and not an established one and that should be taken into account.
If you choose income tax all the 3 categories should be taxed so that
treasury could find a source for its funds and also utilize the same for the
development of Freedonia. The ruler should not consider using it for his
own personal purposes. Tax credits or tax deductions could be considered
for citizens and foreign tax credit should also be provided as this helps in
avoiding double taxation and will reduce the tax burden which will motivate
those into exports.
2) Congratulations! Based on your outstanding job as Secretary of the
Treasury of Freedonia you have been appointed to the Inter-Galactic
Accounting Standards Presidium (IGASP). You are one of 9 members
of this prestigious group who have the responsibility of determining
accounting policy for the entire Milky Way. On your first day you
discover that the other 8 members are evenly split between a rules based
and a principles based system. Half the group insists that Last in First
Out (LIFO) should be prohibited in the galaxy while the other half
support keeping it. Four members believe that understandability is the
most important attribute of accounting while the other four believe in
representational faithfulness. Half of the members argue for 1 ‘market’
for lower of cost or market while the other half propose 3 definitions of
market. The board is also divided on the cutoff date for determining
whether a liability should be classified as short term or long-term. Four
believe it should be the balance sheet date while the other four believe in
the release date of the financial statements. Finally half believe in a
universal language of business while the other half disagree with this.
REQUIRED: AS THE DECIDING MEMBER CAST YOUR VOTE ON
THESE ISSUES AND DEFEND YOUR POSITION.
In the case of a rules based accounting system a set of detailed rules will be
listed which must be followed. It could be said that having rules could
increase the accuracy and reduce the ambiguity while preparing financial
statements but an accountant will have to face various situations while
preparing financial statements and the rules listed may not contain all those
which could be used to tackle those situations. Principal based system
provides general guidelines. So accountants could use those general
guidelines which will cover broad areas and then use those in his/her
professional judgement.
Regarding Inventory, LIFO is permitted under US GAAP but not in IFRS.
LIFO could result in higher cost of goods sold and therefore lower tax due
to lower profits. LIFO cant be suggested for inventory accounting. The older
stocks keep on remaining which increases the records and may also result in
stock getting outdated and then being written off.
Both are essential characteristics of a financial statement. It should be
understandable to all users of the financial statements and faithfully
represent all the transactions. The substance of a transaction should be
considered so that it could be accurately presented.
The classification of liabilities as short term or long term should depend on
the period left as at the balance sheet date. If it will be repaid within 1 year
from the date of balance sheet then its short term and if it takes more than
one year then it should be long term.
6 . The Pooh-Phey company has come to you with a problem: they have just
built a beautiful factory on the Freedom Hills of Freedonia. As part of the
$40,000,000 factory; they spent $3,000,000 on safety and pollution control
devices which exceeded the laws of Freedonia. How should they account for that
$3,000,000 expenditure for extra safety and pollution equipment? DEFEND
YOUR ANSWER.
8. To build its new office building the Happy Company borrowed 30,000,000
Freedites (the currency of Freedonia) at 10% when the Freedite was worth $1. A
year later when Happy went to pay off the loan they had to pay 33,000,000
Freedites. However, it cost Happy $34,000,000 to satisfy this loan. Under IFRS
how do you account for the $4,000,000 Happy paid which was in excess of the
principle borrowed? Under GAAP how do you account for this $4,000,000?
Which method do you recommend and why?
