eTrade Pays Up eTrade, an online retailer, fulfills its online orders by shipping its products directly to customers in all 50 states. eTrade does not have a brick-and-mortar store presence in any state, but does operate distribution centers in various states across the country, including State X. Consistent with its practice in all 50 states, eTrade does not collect or remit sales tax to State X. In recent court rulings, State X has taken the position that operating a distribution center within a state constitutes nexus and thus would subject that company to collect and remit sales tax on all sales within that state. As of December 31, 2017, eTrade has operated its distribution center in State X for five years and has never collected or remitted sales tax to State X. Although the Company considers the risk of detection to not be probable, eTrade has estimated the total amount of sales tax payable to the state for the past five years to be $50 million plus $6 million in interest and $4 million in penalties. On March 15, 2018, Mr. Needcash, the governor of State X, established a tax amnesty program. The program provides that any unregistered taxpayer who voluntarily registers to collect sales tax on a prospective basis will be forgiven (1) 50 percent of all unpaid sales tax and (2) all interest and penalties on unpaid taxes. eTrade management decides to take advantage of this program. On June 15, 2018, eTrade completes the necessary paperwork and other actions to participate in the program and pays State X $25 million to settle its obligation through December 31, 2017.

As of December 31, 2017, what amount, if any, of sales taxes due should be recognized in eTrades financial statements? Circle the Best Answer.

a. eTrade should neither recognize any sales tax payable nor disclose the amount as a reasonably possibly contingent liability as of December 31, 2017.

b. eTrade should not recognize any sales tax payable, but should disclose the amount as a reasonably possibly contingent liability as of December 31, 2017.

c. eTrade should recognize the amount of estimated sales tax payable of $50 million as of December 31, 2017.

d. eTrade should recognize the entire amount of estimated sales tax payable including penalties and interest, $60 million, as of December 31, 2017.

2. What effect, if any, does eTrades decision to participate in the tax amnesty program have on the amount recognized as of March 31, 2018? Circle the Best Answer.

a. There is no outstanding liability.

b. The outstanding liability should be reduced to $25 million, the amount that eTrade will ultimately settle its obligation for.

c. The outstanding liability should not be adjusted and remains at $50 million.

d. The outstanding liability should not be adjusted and remains at $60 million.

3. What amounts should be recognized in the financial statements for the $25 million payment on June 15, 2018? Answer the question in the following journal entry format