STUDENT CASES to accompany
Accounting & Auditing Research: Tools & Strategies, 7e
NOTE: In addition to the in-chapter and end-of-chapter exercises which serve as short cases you will find the following short cases arranged by course title that can also be utilized as short cases that reuire the student to access the authoritative literature to address the issue presented in the case! "olutions to the cases below are available to instructors on the #eirich #eirich instruct uctor or website website at www!wiley!com$college$weirich ! Accounting & Auditing Research 7e instr Other excellent sources of longer and more detailed cases include the %eloitte Trueblood cases &www!deloitte!com www!deloitte!com$m $mor ore$ e$%T %T'$ '$ca case ses( s(su sub) b)!h !htm tm*+ *+ as well well as the the ,I. I., case casess &www!aicpa!org*!
Topical Index o Student Cases INTER!EDIATE ACC"UNTIN#
ase /: 0eporting acuisition and repayment transactions in the "tatement of ash 'lows ase 1: 0ecording a forfeited payment ase 2: 0evenue and expense recognition associated extended warranties ase 3: ,ccounting for 4due on demand5 note payable ase 6: .urchase of a controlling interest with a greenmail premium ase 7: 0evenue recognition in the construction industry ase 8: ,ccrual and measurement of interest payments ase 9: 0ecognition of an asset transfer when title has not yet been received ase : apitalization of interest and property taxes on a construction pro)ect ase /;: %eferred compensation and life insurance policy recognition ase //: 0eporting earnings per share balances for subsidiary companies ase /1: %eferment of lease payments ase /2: %isclosure of prior period ad)ustments in the statement of cash flows ase /3:
ain on a nonmonetary exchange
AD$ANCED ACC"UNTIN#
ase /: 0eporting of letters of guarantee notes payable ase 1: 'actors affecting minority interest control ase 2: .rofits and losses in the investment in foreign currencies ase 3: ,mortization of foreign currency transaction gains and losses ase 6: 0eflection of expensed computer programs on consolidated financial statements ase 7: lassification of a proposed financial instrument as a h edge ase 8: %isclosure of proceeds and payments from cash flow hedging activities ase 9: .roper valuation of a 4guaranteed5 business combination
#"$ERN!ENT AND N"T%"R%'R"IT ACC"UNTIN#
ase /: 0ecognition restricted or non-restricted assets that are promised but not received ase 1: ,ffect of 4permanent5 reductions in the value of 4promised5 assets ase 2: %isclosure and classification on a company?s "tatement of cash 'lows ase 3: %isclosure of potential interest rate swings and commercial paper b y a city ase 6: apital and operating leases between related parties ase 7: Elimination of profits on intercompany sales ase 8: 0eporting of funds and potential obligations on bonds issued for third parties ase 9: %isclosure of payments made to agents or bro=ers ase : ,ccrual of vacation time of unestablished employees
AUDITIN#
ase /: ommunication with predecessor auditors ase 1: "cope limitations ase 2: Outside services for inventory counts ase 3: "upplementary disclosures ase 6: 0estating prior years? financial statements ase 7: Independence in a review or compilation engagement ase 8: @ualified report and account classification ase 9: 0e-issuance of financial statements ase : ommunication with audit committees ase /;: ,ccounting for assets held for sale
TA(
ase /: #hen should gross income be accruedA ase 1: "toc= purchased by an employee ase 2: Income sourcing- international ase 3: Business deductions ase 6: %eduction for foreign travel ase 7: ontingent liabilities
INTER!EDIATE ACC"UNTIN#
Case ): enerous enerous <*! enerous < until it sells the automobile! <! Cow should
Case .: Bo Bro=er ompany charges a fee for bringing together the ,cme onstruction ompany and the 'irst Ban= ompany! The parties agree that Bo earns her fee when ,cme and 'irst 4agree5 to the terms of the construction mortgage! Cowever+ Bo can receive four types of documents to 4settle5 this matter: &a* a non-interest bearing+ unsecured 4negotiable5 note in payment of the fees earned+ which is payable over the time period of the related construction mortgageJ &b* a non-negotiable note payable over the same time period as in case &a*J &c* a commitment letter+ not contingent upon the 4future event5 of the borrower receiving certain construction drawsJ or &d* a commitment letter+ where the fees would be paid only if the borrower actually receives the draws for the construction from the lender! Bo as=s the accountant when to recognize revenues under each of these four scenarios! Case 7: Games Olds buys a four-year+ D/+;;;+;;; certificate of deposit from the "econd National Ban=! Games will receive 6 interest in year /J 6!6 in year 1J 7 in year threeJ and 7!6 interest in year 3! If Games 4redeems5 this certificate before the maturity date+ he would receive a cumulative 3!6 annual rate of interest of 3!6! The Ban= has ascertained that less than one percent of its depositors redeem their certificates before the maturity date! The ban= as=s its accountant how to accrue and measure such interest payment obligations! Case /: On Ganuary /+ year /+ regory to remain as president of the 0eed ompany+ in 1;;; it promises to pay her &or her estate* D1;;+;;; per year for the next /6 yearsFeven if she leaves the company or dies! 0eed wants to properly record this transaction as deferred compensation+ but is unsure of how many years it should use to amortize this cost!
Case )): The Bootsie Colding ompany has sales exceeding D/; billion and each of its three+ wholly-owned subsidiaries has sales exceeding D1 billion! Three years ago+ the subsidiaries had 4complex5 capital structuresFuntil Bootsie acuired them! Bootsie?s annual report shows its consolidated income and individual income statement accounts of each subsidiary company! "hould Bootsie also report separate earnings-per-share balances for the three subsidiary companiesA Case )*: eila ompany began an operating lease arrangement with %ebco Industries+ which was slated to begin on Ganuary /+ at monthly lease payments of D/;+;;;! Cowever+ %ebco?s negligence prevented eila from moving in on timeFsince it failed to clean up the place adeuately enough to earn a ertificate of Occupancy from the township! Thus+ on Ganuary /+ eila spent D6+;;; for leasehold improvements+ which enabled her to obtain the needed ertificate of Occupancy on ,pril /! In any event+ eila paid %ebco all the reuired D2;+;;; lease payments and has decided not to pursue legal action for the 4un-ready5 building! Cowever+ can eila defer the D2;+;;; Ganuary-
Case )7: ,lbright Inc! has recently issued a /; stoc= dividend to its existing stoc=holders! ,s a result of the issuance of the stoc= dividend the mar=et price of the stoc= declined 16! ,lbright has reuested your assistance as to treating this stoc= dividend as a stoc= split! #ould this be acceptable under >,,.A Case )/: Corizons Inc! has agreed to sell an investment in a subsidiary that has been accounted for on the euity method of accounting to a minority stoc=holder in exchange for the stoc=holder?s share in Corizons! "ince the fair value of the investment exceeds its boo= value+ Corizons EO is considering recognizing a gain on the exchange! Cowever+ the new 'O at Corizons is recommending to the board of directors that the excess from the exchange be accounted as a credit to euity! Corizons turns to you for adviceL
AD$ANCED ACC"UNTIN# Cases Case ): 0osie orporation has 8; of the outstanding voting stoc= of "mith orporation and /; of the voting stoc= of Tommy orporation! "mith also )ust spent D/;+;;; to acuire 1; of Tommy?s voting stoc=! "mith has issued irrevocable letters of credit to guarantee Tommy?s notes payable! In the current year+ Tommy lost D/;;+;;;! Cow should the parties report the above arrangements in its consolidated financial statementsA Case *: Goe Broc= owns /;+;;; of the 7;+;;; outstanding shares of Big orporationJ eslie 0oss own 1;+;;; sharesJ
Case 7:
#"$ERN!ENT AND N"T%"R%'R"IT ACC"UNTIN# Cases
CASE ):
On Ganuary /+ the Cawaii ancer Institute has received a promise from the Obama 'oundation to receive a building that the 'oundation recently appraised at D1;;+;;;! Cowever+ the building cost only D/16+;;;! The ancer Institute promised to =eep the building 4permanently restricted+5 i!e!+ never to sell it and to use it only for its wor= in helping cancer patients! ,s of the end of the ancer Institute?s fiscal year &%ecember 2/*+ no title to the building was received by the Institute! Cow should the Institute record this transactionA
CASE *:
On Ganuary /+ the Cawaii ancer Institute has received a promise from the Obama 'oundation to receive a building that the 'oundation recently appraised at D1;;+;;;Fbut cost it only D/16+;;;! The Institute promised to =eep the building 4permanently restricted+5 i!e!+ never to sell it and to use it only for its wor= in helping cancer patients! ,fter not receiving title by %ecember 2;+ the Institute inuired as to the status of the promised building! The 'oundation stated that water damage to the building &from last year?s flood* has permanently reduced the carrying value of the building to D/;;+;;;! The 'oundation had initially hoped to set up a fund drive to help 4clean up5 the building! Cowever+ both parties have agreed that as of %ecember 2/+ this fund drive would not materialize and the date to receive the building would remain un=nown! Cow should the Institute now record the promised giftA
CASE +:
On Ganuary /+ the Old Town Ceart ,ssociation received a D/+;;;+;;; endowment from the hamber family! Mnder terms of the gift+ the ,ssociation must permanently restrict the endowmentFbut may spend up to half of the interest earned on the gift or half of all profits earned from selling such investments for operating purposes! The ,ssociation immediately invested the gift proceeds in some 4blue chip5 stoc=s! ,fterwards+ the ,ssociation spent half of the D6;+;;; dividends earned from the hamber portfolio for operating purposes! #here in the "tatement of ash 'lows &i!e!+ operating+ investing+ or financing activities* should the ,ssociation report these transactionsA
CASE :
On ,pril /6+ the ity of Old .utz invests its 4available5 excess cash with an investment bro=er! The investment bro=er then purchases ;-day commercial paper from a set of 4blue chip5 companies! On Gune 2;+ the last day of the ity?s fiscal year+ the ity planned to 4roll over5 the commercial paper when they mature! Cowever+ interest rates fell dramatically in late Gune resulting in a lower value for the 4maturing5 commercial paper!
The Oa=land ounty Cospital performs lots of wor= for
CASE 7: "ome community leaders in "t! .aul+
Employees who leave the ity receive payment for all vested+ unused vacation days! Cowever+ all employees must wor= for at least six months before they can ta=e any vacation days! The ity believes that 'ran= will be an excellent employee and assumes that he will wor= past the reuired six months! "hould the ity accrue vacation time for the ity
AUDITIN# Cases Case ): In year /+ Goe Gosephs+ .,+ reviewed ander ompany?s financial statements! Cowever+ in year 1+ the ander ompany hired Tom Colstrum+ .,+ to audit its financial statements! "hould Tom meet with Goe+ and would Goe be considered as a predecessor auditorA Case *: In Tom Colstrum?s audit of the ander ompany+ Tom see=s to obtain an attorney representation letter regarding any+ undisclosed potential corporate liabilities! Gohn Engle+ the ander ompany >eneral ouncil responded to this letter by citing ,merican Bar ,ssociation &,B,* language that emphasizes attorney-client privilege regarding such unasserted claims! E!g!+ the letter uses such phrases as 4it would be inappropriate for this firm to respond to such general inuiries5 and 4we can not comment upon the adeuacy of the company?s listing+ if any+ of unasserted possible claims or assessments!5 %o such responses constitute limitations in the scope of the auditA Case +: rain ompany?s financial statements!
Cugo purchased some MN securities+ which made him lose his independenceFa fact noted in his ., compilation report! Now+ the MN ompany management wants Cugo to issue comparative two year financial statements &last year and this year*! an Cugo re-issue his review report now that he is no longer independent of the MN ompanyA Case 7: Goseph Gosephs+ ., is auditing the Elder ompany?s current year?s annual financial statements and notices that the ompany has violated the 1!/ to /!; current ratio reuirements as part of its debt agreement with the "unshine Ban=! The company?s current ratio is /!96 to /! Elder?s management believes &strongly* that it will improve their current ratio during the ;-day grace period! Nonetheless+ the ban= has the 4right5 to call in the entire D1 million loan! Cowever+ Goseph is not so sure and must issue his report before this grace period expires! "hould Goseph ualify his opinion or demand that Elder re-classify this loan as a short-term liability+ in light of the above circumstancesA Case /: %uring Goseph Gosephs?+ .,+ audit of the Belton ompany?s prior year?s financial statements+ he notices that sales and profits have fallen dramatically from their previous year highs! Cis subseuent &Ganuary 1;+ current year* discussion with Gohn and and Gill Cer &eual 6; shareholders of the ompany* indicate that Gohn recognizes that he spent much less time in the previous year with the business than he did in prior years! Ce agreed to refund D/;;+;;; of his D/ million previous year?s compensation immediately+ and Gohn and Gill agreed that he would receive his original D/ million compensation in future years &as long as he re-dedicated his efforts on behalf of the company*! Goseph then reduced the Belton ompany?s previous year?s salary expense for the D/;;+;;; refund+ since the parties attributed these transactions to previous year?s events! Ce then issued the audited financial statements on
TA( 2 Cases Instructions: In writing a tax memo begin the discussion of the law with at least one paragraph on the relevant ode language! .inpoint the location of the relevant language in the ode as precisely as possible! Then add a paragraph&s* on any relevant Treasury 0egulation! Then describe any relevant cases or 0evenue 0ulings! #rite clearly and concisely so that the tax memo is normally limited to three pages!
#rite a memo identifying the legal I""ME&s*+ conclusion+ list of relevant authorities+ discussion of the law+ and the application of the law! Mse these subheadings+ as it is not enough to describe the law! 'or each ,"E discuss and apply at least one relevant ,"E or revenue ruling! The most important aspects of the memo are the I""ME statement&s* and the application of the law to the problem facts! The application should integrate reference to every source of law previously discussed! %o not )ust answer the uestion as=ed in the problem!
CASE )3 4hen #ross Inco5e is Accrued 6asic8
Taxpayer is a securities firm which uses the accrual method of accounting! Taxpayer executes stoc= trades and performs settlement functions! "ettlement functions include recording the sale and confirming it with the customer! Trades made on %ecember 19+ 1;6+ until the end of the month are not settled until Ganuary of 1;7! Taxpayer made D/+;;;+;;; of net commissions from these trades in late %ecember! "ince the security is not credited to the customer?s account until settlement date+ taxpayer wants to declare the income on the settlement dates in 1;7! Taxpayer does not receive the money until Ganuary 1;7! ,dvise the taxpayer! ISSUE:
#hether an accrual basis securities firm has gross income under sec! 3 6/&a* on the trading date or the next year on the settlement date when all the wor= is performed+ payment is due+ and money receivedA
CASE *3 usiness Deductions9 6asic8
'or the past two years+
CASE +3 Stoc purchased ;< an e5plo
"ally became an employee of %ot>ismo+ Inc!+ a privately held firm! On %ecember /6+ 1;2+ "ally was allowed to buy 1;+;;; shares of %ot>ismo stoc= for D3;+;;; dollars! #hen "ally bought the stoc=+ each share was worth D1! %ot>ismo retained the right to repurchase each share for D1 original purchase price if "ally leaves %ot>ismo at any time during the next two years for any reason! %ot>ismo stoc= increased to D6 per share in %ecember /6+ 1;6+ when the two year restriction ended! "ally sold the stoc= on Ganuary /9+ 1;7 for D per share+ after the announcement of a new patent for %ot>ismo! ,dvise "ally roughly how much tax she must pay and for what year&s*! ,ssume "ally is in the 26 tax brac=et for ordinary income and /6 for long term capital gains!
CASE 3 Deduction or oreign Tra=el 6Inter5ediate8
"ylvia is a professor in business at the Mniversity of Cawaii! "he went on sabbatical for an academic year to ta=e courses in hinese at National Taiwan Mniversity in Taipei+ Taiwan+ to expand her =nowledge of international business and to conduct research! On wee=ends and during the three wee= winter brea= "ylvia went sight-seeing by herself around the island+ but one time gave a lecture in Tainan+ Taiwan! "ylvia has documented her expenses and saved her receipts! ,dvise "ylvia!
CASE -3 Inco5e Sourcing 2 International Tax 6Ad=anced8
Cidetoshi was a world-renowned roc= star from Newountry! "ony-M", 0ecords contracted with Cidetoshi to produce records! "ony-M", 0ecords retained all intellectual property rights in the recordings! The contract granted Cidetoshi payments or 4royalties5 based upon future sales of recordings! Cidetoshi paid taxes on the payments in Newountry as royalties! The M!"!-Newountry treaty exempts royalties from tax in the M!"! Cowever+ Newountry tax treaty+ did not define royalties or compensation for personal services! The I0" has told Cidetoshi+ his contract with "ony-M", generates personal service income in the Mnited "tates! ,dvise Cidetoshi!
CASE .3 Contingent lia;ilities in a Section +-) transer 6Ad=anced8
co is an accrual basis taxpayer with multiple lines of businesses! One business is a gas station! The land underneath the gas station did not appear contaminated when co purchased it! Cowever+ the land now has potential soil and groundwater problems &environmental liabilities*! co engaged in a section 26/ tax free exchange transferring the gas station to a new subsidiary "co in exchange for the stoc= of "co and the assumption of the environmental liabilities! Before the transfer+ co did not ta=e any environmental remediation efforts to clean up the land?s soil and groundwater problems! Cow is the basis of co?s land determinedA