For the following cases: (1) Cite your sources, for example,
“asc.fasb.org 505-30-25-3”.
(2) Answer the question being asked as
clearly and concisely as possible. Be
thorough
but don’t write the next “Great American Novel”.
CASE
#1
Mead Motors purchases an automobile
for its new car inventory from Generous Motors. Generous Motors finances this
transaction through its financial subsidiary, Generous Motors Credit Company
(GMCC). Mead pays no funds to GMCC until it sells the automobile. At point of
sale, Mead must then repay the balance of the loan plus interest to GMCC.
How should Mead report the
acquisition and repayment transactions
in its Statement of Cash Flows?
CASE
#2
Narda Corporation agreed to sell all
of its capital stock to Effie Corporation for three monthly payments of
$200,000 each. After Effie made the first required payment, Effie ceased making
any other payments. The stock subscription agreement states that Effie, thus,
forfeits its payments and is entitled to no other future consideration.
How should Narda record the $200,000
forfeited payment?
CASE
#3
Lowland Appliances Stores offers
customers purchasing its appliances separately priced (extended) warranties.
Lowland services these extended warranties. Its customers can receive no
refunds for not using these warranties, and, of course, Lowland must honor
these contracts—regardless of any future costs in doing so. Lowland also
“tracks” the profits and losses these types of warranties generate by appliance
category—in order to help maintain a competitive price and costing structure.
How should Lowland recognize the
revenues and expenses of such extended warranties?
CASE
#4
As of January 1, 2014, the Lohse
Company owes the First Arbor Bank $350,000 which is due on December 31, 2014.
Since Lohse seems unable to repay the note, the bank agreed that Lohse can
“settle” this balance by agreeing to make four, annual installments in each of
the next four years. However, Lohse must agree to add a “due on demand”clause
to the note. Specifically, First Arbor Bank (the lender) will “do its best” not
to call the note “provided that no adverse significant shift in Lohse Company’s
operations occur.” However, First Arbor Bank has the sole discretion to (1)
ascertain if these adverse conditions arose and (2) then call the note due
immediately.
How should Lohse account for this
situation?
CASE
#5
On January1, year 1, Melvin
Corporation promises to “unconditionally” transfer a building that cost
$100,000 (appraised recently at $300,000) to the Vivian Company on January 1,
year 2, in exchange for a boat that Vivian Company bought for $250,000. As of
December 31, year 2, Melvin Corporation still has not transferred title to the
building, although Melvin Corporation has received title to the boat.
How should Vivian Company record
these transactions?
How should Melvin Corporation record
these transactions?
CASE
#6
Herb Construction Company is building
a hotel for speculative purposes. That is, the Company has not yet found a
buyer for the hotel, but expects to do so within a few months. Herb, who
expects to spend about another two years to complete construction of the hotel,
asks his accountant if interest and property taxes associated with this
construction site should be capitalized or expensed.
Should Herb capitalize or expense the
interest and property taxes?
What rate of interest should Herb
use?
CASE
#7
In order to help induce Jill Gregory
to remain as president of the Reed Company, in year 2000 Reed Company promises
to pay Jill (or her estate) $200,000 per year for the next 15 years—even if she
leaves the company or dies. Reed Company wants to properly record this
transaction as deferred compensation, but is insure of how many years it should
use to amortize this cost.
Over how many years should Reed
Company amortize these payments?
Reed Company also purchased a “whole
life” life insurance policy on Jill, naming the company as the sole
beneficiary.
Can Reed Company offset the cash
surrender value of the life insurance policy against the deferred compensation
liability?
CASE
#8
The Bootsie Holding Company has sales
exceeding $10 billion and each of its three, wholly-owned subsidiaries has
sales exceeding $2 billion. Three years ago, the subsidiaries had “complex”
capital structures—until Bootsie acquired them. Bootsie’s annual report shows
its consolidated income and individual income statement accounts for each of
the three subsidiary companies.
Should Bootsie also report separate
earnings-per-share balances for the three subsidiary companies?
CASE
#9
Leila Company began a three year operating
lease arrangement with Debco Industries. The lease was slated to begin on
January 1, at monthly lease payments of $10,000. However, Debco’s negligence prevented Leila
from moving into the building on time. Debco had failed to clean up the building
adequately enough to earn a Certificate of Occupancy from the township in which
the building is located. On January 1, Leila spent $5,000 for leasehold
improvements on this building. These improvements enabled Leila, on April 1, to
obtain the needed Certificate of Occupancy. Leila paid Debco all the required
lease payments and has decided not to pursue legal action for the “un-ready”
building.
Can Leila defer the $30,000 (January
through March) lease payments over the remaining 33 months of the lease contract?
CASE
#10
After the Julie Company issued its
previous year’s financial statements, it noticed that it incorrectly calculated
depreciation expense and, thus, disclosed this fact as a prior period
adjustment in its current year’s financial statements. This difference did not
affect any cash balances, since Julie had operating losses for both years.
However, Julie did not issue comparative financial statements in the current
year.
How should Julie Company disclose
this prior period adjustment in its current year’s Statement of Cash Flows?
CASE
#11
Albright, Inc., has recently issued a
10% stock dividend to its existing stockholders. As a result of the issuance of
the stock dividend, the market price of the stock declined 25%.
Would it be acceptable under GAAP for
Albright to treat this stock dividend as a stock split?
CASE
#12
The Builtwell Construction Company is
building a hospital for a third party. Builtwell borrows substantial funds from
a foreign bank and pays the required interest costs as scheduled. Builtwell
also incurs some foreign currency transaction gains and losses on these
transactions. Builtwell properly amortizes the interest costs over the life of
the construction project, but would now also like to amortize the associated
foreign currency transaction gains and losses as well.
Can Builtwell amortize the associated
foreign currency transaction gains and losses?
CASE
#13
On January 1, year 1, the Allen
Company issues 100,000 shares of its stock (which is valued at $10 per share)
to acquire the Natie Company. The purchase agreement also states that Allen
will pay $200,000 in year 2 if Natie has net income of at least $400,000 in
year 2. There is a 50% chance Natie will meet or exceed $400,000 of net income
for year 2.
How should Natie recognize this
transaction?
CASE
#14
In year 1, Joe Josephs, CPA, reviewed
Lander Company’s financial statements. However, in year 2, the Lander Company
hired Tom Holstrum, CPA, to audit its financial statements.
Should Tom meet with Joe?
Would Joe be considered a predecessor
auditor?
CASE
#15
In Tom Holstrum’s audit of the Lander
Company, Tom seeks to obtain an attorney representation letter regarding any
undisclosed potential corporate liabilities. John Engle, the Lander Company
General Council, responded to this letter by citing American Bar Association
(ABA) language that emphasizes attorney-client privilege regarding such
unasserted claims. E.g., the letter uses such phrases as “it would be
inappropriate for this firm to respond to such general inquiries” and “we
cannot comment upon the adequacy of the company’s listing, if any, of
unasserted possible claims or assessments.”
Do such responses constitute
limitations in the scope of the audit?
CASE
#16
Mary Howard, CPA, has audited the
Wheat City Grain Company’s financial statements for many years.. Much of Wheat
City’s assets consist of wheat stored in three of its grain elevators, and the
Company maintains perpetual inventory records for the quantity of wheat stored
there. Concurrently, on a surprise basis, at different times each month, state
grain inspectors also “count” the quantity of wheat found in these
elevators—and have found no material differences in the perpetual records
over the past five years. To save both time and audit fees, Mary wants to rely
on the state inspectors’ counts instead of making her independent counts.
Can Mary do this?
CASE
#17
Aaron Jones, CPA, is auditing the
current year’s financial statements of Low Company, a publicly traded company.
Aaron notices some major fluctuations in Low’s fourth quarter of the previous
year’s financial statement balances. He is aware that security holders of
publicly traded company stock that does not separately report fourth quarter
results often “impute” such results by subtracting data based on third quarter
interim balances from the year-end balances. Thus, companies should report such
significant events as disposals of segments and other unusual items for that
quarter as a note to the annual financial statements.
Aaron notices that Low makes such
disclosures but is unsure if his firm should audit these additional,
supplementary disclosures.
Should Aaron audit these supplementary
fourth quarter disclosures?
What other steps, if any, should
Aaron perform in this regard?
CASE
#18
Joe Josephs, CPA, issued an
unqualified audit opinion for the Johnson Company’s previous year’s financial
statements, which used a modified accrual basis of accounting (which is
considered to be “an other comprehensive base of accounting (OCBOA)”). In the
current year, Johnson switched to a (normal, full) accrual system, and wants to
show comparative financial statements for the two years.
Should Joe require the restatement of
the prior year’s financial statements using this new basis of accounting ?
What disclosures, if any, should be
made to the financial statements and Joe’s audit report?
CASE
#19
Hugo Crossman, CPA, issued a review
statement for the CUNY Company for last year and a compiled statement in the
current year. During the current year, Hugo purchased some CUNY securities,
which made him lose his independence—a fact noted in his CPA compilation
report. Now, the CUNY Company management wants Hugo to issue comparative two
year financial statements (last year and this year).
Can Hugo re-issue his review report
now that he is no longer independent of the CUNY Company?
CASE
#20
Joseph Johnson is completing his
audit of the Bolton Company’s current year’s financial statements and reads in
SAS 114 (AU Section 380) that he should communicate his results with members of
Bolton’s audit committee. Despite many
requests for many years, Bolton has established no such committee—primarily because
it has only two stockholders.
What should Joseph do now?
