Assignment 1 -

Write a 400 (approximate)-word response for each of the following cases answering the questions located at the end of each case.

• Case 1-1 Generally Accepted Accounting Principles
• Case 1-3 Politicization of Accounting Standards
• Case 2-2 The Theoretical Foundation of Accounting Principles

Format your paper consistent with APA guidelines.

Case 1-1 Sources of GAAP

The FASB ASC is now the sole authoritative source for all U.S. GAAP.

Required:

a. What are the major goals of the FASB ASC?

b. How is the FASB ASC expected to improve the practice of accounting?

c. What literature is now contained in the FASB ASC?

d. What should an accountant do if the guidance for a particular transaction or event is not specified within the FASB ASC?

Case 1-3 Politicalization of Accounting Standards

Some accountants have said that politicalization in the development and acceptance of generally accepted accounting principles (i.e., standard setting) is taking place. Some use the term politicalization in a narrow sense to mean the influence by government agencies, particularly the SEC, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromising that takes place in bodies responsible for developing these principles because of the influence and pressure of interested groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, etc.).

Required:

a. The Committee on Accounting Procedure of the AICPA was established in the mid to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed, and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicalization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, APB, and FASB operated or operate. Cite specific developments that tend to support your answer.

b. What arguments can be raised to support the politicalization of accounting standard setting?

c. What arguments can be raised against the politicalization of accounting standard setting? (CMA adapted)

Case 2-2 the Theoretical Foundation of Accounting Principles

During the past several years, the FASB has attempted to strengthen the theoretical foundation for the development of accounting principles. Two of the most important results of this attempt are the Conceptual Framework Project and the Emerging Issues Task Force. During this same period, the FASB has been criticized for imposing too many standards on the financial reporting process, the standards-overload problem.

Required:

a. Discuss the goals and objectives of

• The Conceptual Framework Project
• The Emerging Issues Task Force

b. Discuss the standards overload problem.

Assignment 2 -

Narrative for last question.. Simple short answers of mayne one or two sentences.

Complete Problem Assignments 1-15

1. What are consumption taxes?

2. Differentiate horizontal from vertical equity.

3. When was the constitutional amendment permitting an income tax ratified?

4. What is a sin tax?

5. What are three objectives of income taxation?

6. What are the three taxable persons that pay all of the income taxes?

7. What is the difference between gross revenue and gross income for a business?

8. What are at least three unique features of the individual tax model when compared to the corporate tax model? What are three similarities between these models?

9. What is the purpose of adjusted gross income for an individual?

10. What are the four filing statuses for which there are standard deductions?

11. Differentiate the personal exemption from the dependency exemption.

12. How is gain or loss on the disposition of business or investment property determined?

13. What is the difference between a deduction from income and a credit against a tax liability? Illustrate your answer.

14. What are three characteristics of a sole proprietorship? Are these characteristics the same as or different from those of a partnership? What are three characteristics of a limited liability company that differ from those of a partnership?

15. Compare a C corporation to an S corporation

S corporations are formed the same as C corporations and revert to being taxed as C corporations if they cease to qualify for S status. S corporation shareholders have the same limited liability protection that C corporation shareholders possess; however, 5 corporations avoid the principal disadvantage of the C corporation form-double taxation-by being taxed in a manner similar to partnerships with both profits and losses flowing through to its shareholders. To elect S corporation status, the corporation must qualify as a "small business corporation" as defined under Internal Revenue Code Section 1361 and its shareholders must consent to this election. A small business corporation is a domestic corporation that may have no more than 100 shareholders who, with limited exception, must be individuals who are not nonresident aliens, and it may have only one class of common stock outstanding. If a corporation violates any one of the above requirements at any time, the S corporation status will be revoked and it will be taxed as a regular C corporation.

To become an S corporation, the corporation must file Form 2553: Election by a Small Business Corporation, along with consent statements signed by all shareholders of record at the time the election is made. The election can be made at any time during the preceding year or before the 15th day of the third month of the tax year for which the corporation wishes to have S corporation status.

Qualifying corporations that elect S corporation status use the conduit concept of taxation, passing their profits and losses through to their individual owners, thus avoiding a double tax on corporate profits. S corporations file an information tax return, Form 11205: U.S. Income Tax Return for an S Corporation, due two-and-one-half months after year-end (March 15 for calendar-year corporations). The shareholders are taxed on their share of profits, whether they are actually distributed to them or they are retained in the corporation. So a conduit entity is usually appropriate if the profits are distributed to the owners rather than reinvested in the business, because such profits can be distributed without the owners incurring any additional tax. Personal-service business activities (such as accounting or engineering) usually fall into this category.

S corporation shareholders can be employees of an S corporation for employment tax purposes and pay the same payroll taxes as other employees on their salary or wages. Similar to partners, however, shareholders who own more than 2 percent of the corporation's stock cannot participate in most employee fringe benefit programs on a tax-free basis. For example, the payment of health insurance premiums by the corporation for shareholders owning more than a 2-percent interest in the corporation, results in additional salary rather than a tax-free benefit.

Similar to partnerships, a shareholder's basis is a measure of the shareholder's investment in the corporation's stock. A shareholder's beginning basis is the cash and adjusted basis of any property contributed to the corporation (or the price paid for the corporate stock). The shareholder's basis is then increased by the shareholder's share of the corporation's income or gain and decreased by any distributions or losses. The deduction of losses by the shareholder is limited to the shareholder's basis in his or her stock, similar to the limit on a partner's loss deduction to his or her basis in the partnership interest. Unlike a partnership, however, a shareholder in an S corporation cannot increase his or her basis for debts undertaken by the corporation because an S corporation shareholder has no personal liability for the debts of the corporation. Thus, if the entity in examples 1.34 and 1.35 were an S corporation, Jennifer could not have increased her basis for the corporation's debt.

Example -

Assume the same facts as examples 1.34 and 1.35 except that the business is an S corporation instead of a partnership. Jennifer's basis adjustments are the same shown in example 1.34 as an S corporation. When the S corporation borrows $5,000 (example 1.35), however, Jennifer cannot increase her basis; it will remain $500. Jennifer's second-year deduction is limited to her $500 basis, reducing it to zero, and she must carry the remaining $500 loss forward to year 3 when she again has basis in her S corporation stock. Similarly, the loan repayment has no effect on Jennifer's stock basis.

S corporations and partnerships also differ in that a shareholder's share of S corporation profits are not subject to self-employment tax while general partners must pay self-employment tax on their share of the partnership profits. This provides an incentive for S corporation shareholders to take lower salaries (which are subject to employment taxes) and a higher distribution of profits (which are not subject to self-employment taxes). If the IRS deems the salary paid to a shareholder-employee to be unreasonably low on audit, it may reclassify some or all of a cash distribution of profits as salary and assess additional employment taxes on both the shareholder and the corporation.

As conduit entities, partnerships, limited liability companies, and S corporations are especially attractive in the early years of a business activity when operating losses are likely to occur. In the case of a C corporation, such losses are locked inside the corporation. The losses do not provide a tax benefit until the corporation becomes profitable. Losses from a conduit entity flow through to the owners and benefit the owners in the same year that the loss occurs (assuming the owners are able to deduct the losses). When conduit entity owners have high marginal tax rates, the benefit of loss flow-through is especially attractive.

At first glance, conduit entities may appear to be superior to C corporations from a purely tax perspective. Such a conclusion is shortsighted. C corporations have some favorable tax characteristics that are not available to any conduit entity. In cases in which these characteristics can be exploited (such as the ability of owners to be treated as employees and to benefit from tax-free employee fringe benefits), they can more than compensate for double taxation.