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In this problem, you are asked to write a letter to the taxation authorities. As background, you should know that your letter is because of a brief conversation by telephone with an IRS agent who was assigned to answer phone calls from corporations seeking initial taxation office perspectives. You phoned to ask about the Sinclair Oil and Gas choice of joint cost allocations as described in Problem 17- 26. In the phone call, the agent did not comment on the costing methods and asked that you write the letter to the tax authorities that addresses the issue (as described in problem 17-26). One thing that you are also concerned about is that the agent mentioned the IMA Statement of Ethical Professional Practice (p. 17 of the text). Because of your pursuit to minimize the company's tax liability, he pointed out the according to the IMA Statement's Integrity standard, there seems to be a conflict of interest between your employment with the company and your seeking to reduce the company's corporate citizenship tax responsibilities. Please also address this concern in your letter to the tax authorities. 17-26. JOINT-COST ALLOCATION, PROCESS FURTHER. Sinclair Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate three nonsalable intermediate products: ICR8, ING4, and XGE3. These intermediate products are further processed separately to produce crude oil, natural gas liquids, and natural gas (measured in liquid equivalents). An overview of the process and results for August 2020 are shown here. (Note: The numbers are small to keep the focus on key concepts.) Joint Costs $1,800 Separable Costs ICRS Processing $175 Crude Oil 150 barrels $18 per barrel Hydrocarbons Processing INGA Processing $105 NGL 50 barrels @ $15 per barrel XGE Processing $210 Natural Gas 800 eqvt. barrels $130 per eqvt barrel A federal law that has recently been passed taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquids or natural gas. Starting August 2020, Sinclair Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing t three separate saleable outputs. Assume no beginning or ending inventory. Required 1. Allocate the August 2020 joint cost among the three products using the following: a. Physical measure method b. NRV method 2. Show the operating income for each product using the methods in requirement 1. 3. Discuss the pros and cons of the two methods to Sinclair Oil & Gas for making decisions about product emphasis (pricing, sell-or- process-further decisions, and so on). 4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint-cost-allocation method you recommend Sinclair use