Appropriate Accounting Treatment Regarding Evade 's Virginia State Sales Taxes

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Executive Summary The purpose of this memo is to discuss the appropriate accounting treatment regarding eVade’s Virginia state sales taxes. The information available as of December 31, 2014, indicates that eVade could reasonably estimate the amount of the potential sales tax liability. However, based on their analysis of the circumstance they concluded that it was not probable that the state of Virginia would pursue any potential sales taxes. As such, it is appropriate based on the fact that it is not probable that the accounting treatment should include the disclosure of estimated amount of unpaid sales taxes. In March of 2015, after the prior year’s financial statements had been posted, the Governor of Virginia announced a tax amnesty…show more content…
As of December 31, 2014, eVade had been operating its distribution center in Virginia for five years and has never collected or remitted state sales taxes as they did not believe the circumstances of their situation indicated that it was probable that they would owe back any sales tax. Although eVade estimates that if they were assessed sales tax by Virginia it would amount to $50 million in taxes, $6 million in interest, and $4 million in penalties. The following analysis will outline the proper accounting treatment for the unpaid sales taxes accrued by eVade and the accounting treatment. As per ASC 450-20-25-2, an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: 1. The amount of loss can be reasonably estimated. 2. Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. The purpose of those conditions is to require accrual of losses when they are reasonably estimable and relate to the current or a prior period. Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. Further, even losses that are reasonably estimable shall not be accrued

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