Accounting for Accrued Taxes, Penalties and Interests

In accordance with the article by Warren, et al., on the 31st of December in 2016, Evade Inc. turns out to be not registered within the Local Authorities of the USA. That is why it has to permit their sales taxes that are withheld within the operation. As an important occassion, eVade Inc. recalculated all the Value Added Tax that were accured, penalties, and Interest that equals $50 Million, $6 Million and $4 Million. The tax numbers that were violated amount to Penalties, Interest and Accrued Tax charged in the Loss and Profit Account. So, the Balance Sheet Item influenced is on the current liabilities has grown by $60 Million and the Income statement is affected by the same magnitude. The reason behind having the transaction posted in the financial statements is because eVade Inc. has the obligatory role of remitting the sales taxes involved in the selling of the goods and services. The Journal Entries relating to the transactions are:

Date

Details

Accounts

Dr

Cr

31-Dec-16

Being Accrued Estimated taxes, Penalties, Interests on eVade Inc.

Accrued Estimated Sales Taxes Accounts

$ 50.00

Being Accrued Estimated taxes, Penalties, Interests on eVade Inc.

Penalties Charged Account

$ 4.00

Being Accrued Estimated taxes, Penalties, Interests on eVade Inc.

Interests Charged Account

$ 6.00

Being Accrued Estimated taxes, Penalties, Interests on eVade Inc.

Creditors Account (Virginia Federal Government)

$ 60.00

According to the International Reporting Standards, on matters relating to Taxes (Gilbertson, et al. 74) a company which does not meet its due or avoiding taxes are subject to penalties and Interests. Value Added Tax, is one of the taxes received and remitted on behalf of the Federal government through the Revenue Authority. The taxes include the fee charged for selling vatable goods and services. Evade Inc. in the current situation has sold the vatable goods whose taxes have not been remitted nor accounted for to the date stated above. Evade Inc. having violated the standard is standard are due for penalties which should be estimated in the books as reported earlier where the Journal entries will be; Debit the respective tax expenses accrued, Penalties charged on the violation and Interest charged over the formal, then Credit the Federal Government. Since the company never accounted for the said taxes, the standard should be followed to the later as described. The Journal Entries are as:

Date

Details

Accounts

Dr

Cr

15-Mar-17

Being an Amnesty given by the Local Authority.

Creditors Account (Virginia Federal Government)

$ 35.00

Being an Amnesty given by the Local Authority.

Penalties Charged Account

$ 4.00

Being an Amnesty given by the Local Authority.

Interests Charged Account

$ 6.00

Being an Amnesty given by the Local Authority.

Accrued Estimated Sales Taxes Accounts

$ 25.00

On, March 15, 2017, (Gilbertson, et al. 74), the county government offered an amnesty on all the companies willing to register and be collecting the Sales taxes on behalf of the state. The Local authorities provided fifty percent waiver of all the total sales taxes accrued, for all the companies that will respond positively to the idea and further extended an exemption on all the penalties and interest. Evade Inc. accepted the offer and took advantage of the same. The accrued taxes, penalties, and interest charged having been recorded on estimation in full, and the transactions are supposed to have the following adjustments done:

The Accrued interest charged should be credited by 50% of the total taxes amounting to $ 25Million and debiting Federal Government – Accrued Taxes.

The penalties and Interest charged on the said accrued taxes should also follow suit by crediting the expenses and debiting the Federal Government – Accrued Penalties and Interests.

On June 15, 2017, eVade Inc. Pays the Federal government through the Virginia local authorities to the tune of $ 25Million as to clear the accrued sales taxes. The transaction reduces the creditor’s amount as well as the Cash. By making the payment to Virginia Local Authorities, the company knocks of the Accrued amount by cash, thereby reducing the current liabilities and the current assets. Journal entries;

Date

Details

Accounts

Dr

Cr

15-Jun-17

Being Cash paid for Accrued Taxes.

Creditors Account (Virginia Federal Government)

$ 25.00

Being Cash paid for Accrued Taxes.

Cash and Bank Accounts

$ 25.00

Analysis

As eVade Inc. operates, it violated the principle of matching concept by having all the costs for a particular period accounted for and impacting the financial statements. As from that eVade Inc. has been under-reporting the expenses of the company until the 31st December 2016 when they released the wrong accountability. (Warren, et al. 110), That being the case, accounting the accrued taxes, penalties and interests charged on the Accrued sales taxes, impacts the Balance sheet by increasing its current creditors and also increasing the expenses in Profit and Loss Account. The transaction in question assists in correcting or the earlier issues that were not observed and thus making an impact in the current Financial Statements whereas they were meant for another period. The effect in question reduces the Profitability of eVade Inc. and increases current liabilities (Federal Government). The transaction leads to a reduction of the retained earnings and at the same time reducing the current liabilities. In overall, the statement of financial position will not have a change in status, but the Income statement will reduce marginally by the magnitude of $ 60 Million.

After recognizing the Accrued sales taxes, penalties and interests charged an amnesty issued also impacted the financial statements. A pardon is a relief offered to taxpayers for fulfilling a particular a condition. eVade Inc. having complied with the requirement so issued by the Local authorities of Virginia, they are entitled to the amnesty. The amnesty in question allows eVade Inc. to reduce its accrued taxes by 50%, which impacts the creditors (Federal Government) by $ 25Million and also at the same time reduces the accrued penalties and interests to a tune of $ $ 10Million. The Impact so stated in this case reduces the current liabilities through the Accrued sales taxes by $ 35 Million while at the same time reducing the Income statement’s expenses by the same magnitude. The transaction improves the profitability of eVade Inc. by $35 Million and at the same time minimizing the Creditors. On that affect the disposable amount of the retained earnings increases by the same amount having no impact on the overall Statement of Financial position.

Consequently, when eVade Inc. made the remittance of money to pay the Federal Government on, June 15, 2017, the cash reduced and at the same time, the reduction also impacted the current liabilities. The transaction only affected the Statement of Financial Position on two sections of the statements. The areas that were affected are Current Assets on the cash and cash equivalents and at the same time the current liabilities of the creditors of the company (Federal government). The transaction reduced the overall Statement of Financial position by the magnitude of $ 25 Million. (Warren, et al. 110), the reason behind the reduction of the Statement of Financial Position only it’s because the transaction revolves around items within the Statement of Financial Position. The transaction accounted for in the books of accounts and are within the Statement of Financial position only have a null effect on the Income statement, but it reciprocates by reducing the fair value of the company.

Conclusion

On December 31, 2016, eVade Inc. estimated the Sales Taxes which were not remitted or even filed at any one point. eVade Inc. being a sales outlet in the county of Virginia has the obligatory role to account for the taxes and reported. The company should obey the principle of matching concept where all the transaction, undertaken within a particular period stated. Also, eVade Inc. should also exercise the Amnesty as asserted by the Federal government through the Virginia County. The amnesty issued assists the taxpayer to shoulder some of the accrued tax expenses, and the rest are forfeited. With the amnesty raised it assists the company recover from the lower profitability reported on recognition of the accumulated taxes and related expenses. Going forward as an entity that has registered as a collecting and remitting company, eVade Inc. should adhere to accountability and remittance of the corporate taxes which include Sales taxes.

Works Cited

Gilbertson, Claudia B, et al. Century 21 Accounting: Advanced. 2015, pp 74

Warren, Carl S, et al. Accounting. 2014, pp 110