Reference no: EM132954134

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.

• 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.

Required:

Problem 1: Why would Plexicon have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?

Problem 2: Does this practice pose an ethical dilemma? If it does, describe the dilemma. If not, why not?

Problem 3: What position, department or outside parties would be affected by Plexicon's ability to "defer" income taxes payable for several years, despite positive earnings?

Problem 4: If you were Sarah Keene, CPA, what would you say to the management of Plexicon?