Student Cases with Solutions to accompany Accounting & Auditing Research: Tools & Strategies (7th edition) NOT: !n addition to the in"chapter and end"o#"chapter e$ercises which ser%e as short cases you will #ind the #ollowing short cases arranged y course title that can also e utili'ed as short cases that reuire the student to access the authoritati%e literature to address the issue presented in the case Other e$cellent sources o# longer and more detailed cases include the *eloitte Truelood cases (wwwdeloittecom wwwdeloittecom+more+*T,+cases-su.htm)/ +more+*T,+cases-su.htm)/ as well as the A!C0A cases (wwwaicpaorg) A topical listing o# the cases is presented with the case and solution #ollowing the listing
Topical !nde$ o# Student Cases !NTR1*!AT !NTR1*!AT ACCO2NT!N3 Cases
Case 1: Reporting acquisition and repayment transactions in the Statement of Cash Flows Case 2: Recording a forfeited payment Case 3: Revenue and expense recognition associated extended warranties Case : !ccounting for "due on demand# note paya$le Case %: &urchase of a controlling interest with a greenmail premium Case ': Revenue recognition in the construction industry Case (: !ccrual and measurement of interest payments Case ): Recognition of an asset transfer when title has not yet $een received Case *: Capitali+ation of interest and property taxes on a construction pro,ect Case 1-: .eferred compensation and life insurance policy recognition Case 11: Reporting earnings per share $alances for su$sidiary companies Case 12: .eferment of lease payments Case 13: .isclosure of prior period ad,ustments in the statement of cash flows Case 1: /easurement and recording of payments for sic0 days
Case 1%: Comparative cash flow statements Case 1': Social security $enefits as assets Case 1(: Recording a stoc0 dividend as a stoc0 split Case 1): ain on a nonmonetary exchange
A*4ANC* ACCO2NT!N3 Cases
Case 1: Reporting of letters of guarantee notes paya$le Case 2: Factors affecting minority interest control Case 3: &rofits and losses in the investment in foreign currencies Case : !morti+ation of foreign currency transaction gains and losses Case %: Reflection of expensed computer programs on consolidated financial statements Case ': Classification of a proposed financial instrument as a h edge Case (: .isclosure of proceeds and payments from cash flow hedging activities Case ): &roper valuation of a "guaranteed# $usiness com$ination
3O4RN1NT AN* NOT",OR"0RO,!T ACCO2NT!N3 ACCO2NT!N3 Cases
Case 1: Recognition restricted or nonrestricted assets that are promised $ut not received Case 2: !ffect of "permanent# reductions in the value of "promised# assets Case 3: .isclosure and classification on a companys Statement of cash Flows Case : .isclosure of potential interest rate swings and commercial paper $ y a city Case %: Capital and operating leases $etween related parties Case ': 4limination of profits on intercompany sales Case (: Reporting of funds and potential o$ligations on $onds issued for third parties Case ): .isclosure of payments made to agents or $ro0ers Case *: !ccrual of vacation time of unesta$lished employees
Case 1%: Comparative cash flow statements Case 1': Social security $enefits as assets Case 1(: Recording a stoc0 dividend as a stoc0 split Case 1): ain on a nonmonetary exchange
A*4ANC* ACCO2NT!N3 Cases
Case 1: Reporting of letters of guarantee notes paya$le Case 2: Factors affecting minority interest control Case 3: &rofits and losses in the investment in foreign currencies Case : !morti+ation of foreign currency transaction gains and losses Case %: Reflection of expensed computer programs on consolidated financial statements Case ': Classification of a proposed financial instrument as a h edge Case (: .isclosure of proceeds and payments from cash flow hedging activities Case ): &roper valuation of a "guaranteed# $usiness com$ination
3O4RN1NT AN* NOT",OR"0RO,!T ACCO2NT!N3 ACCO2NT!N3 Cases
Case 1: Recognition restricted or nonrestricted assets that are promised $ut not received Case 2: !ffect of "permanent# reductions in the value of "promised# assets Case 3: .isclosure and classification on a companys Statement of cash Flows Case : .isclosure of potential interest rate swings and commercial paper $ y a city Case %: Capital and operating leases $etween related parties Case ': 4limination of profits on intercompany sales Case (: Reporting of funds and potential o$ligations on $onds issued for third parties Case ): .isclosure of payments made to agents or $ro0ers Case *: !ccrual of vacation time of unesta$lished employees
A2*!T!N3 Cases
Case 1: Communication with predecessor auditors Case 2: Scope limitations Case 3: 5utside services for inventory counts Case : Supplementary disclosures Case %: Restating prior years financial statements Case ': 6ndependence in a review or compilation engagement Case (: 7ualified report and account classification Case ): Reissuance of financial statements Case *: Communication with audit committees Case 1-: !ccounting for assets held for sale
TA5 Cases
Case 1: 8hen should gross income $e accrued9 Case 2: Stoc0 purchased $y an employee Case 3: 6ncome sourcing international Case : usiness deductions Case %: .eduction for foreign travel Case ': Contingent lia$ilities !NTR1*!AT !NTR1*!AT ACCO2NT!N3 Cases
Case 6: /ead /otors purchases an automo$ile for its new car inventory from enerous /otors; which finances this transaction through its financial su$sidiary; enerous /otors Credit Company </CC=> /ead pays no funds to enerous /otors or /CC until it sells the automo$ile> /ead must then repay the $alance of the loan plus interest to /CC> ?ow should /ead report the acquisition and repayment transactions in its Statement of Cash Flows9
Case 6 Solution: 0rolem !denti#ication : ?ow should a company report; if at all; cash and noncash transactions owed to an entitys financial su$sidiary9 eywords : Cash flows@ financA su$sidiaries@ operating income> Conclusion : &er !SC 23-1-%-%=; /ead should exclude transactions that involve no cash payments or receipts> ?owever; per 23-1-%1(; it should record cash payments to /CC for repayments of principle
Case 8: Barda Corporation agreed to sell all of its capital stoc0 to 4ffie Corporation for three monthly payments of 2--;---> !fter 4ffie made the first required payment; it ceased ma0ing other payments> Dhe stoc0 su$scription agreement states that 4ffie; thus; forfeits its payments and is entitled to no other future consideration> ?ow should Barda record the 2--;--- forfeited payment9 Case 8 Solution: 0rolem !denti#ication : ?ow should a company account for forfeited stoc0 su$scriptions9 /oreover; do such payments constitute operating or other income9 eywords: Stoc0 Su$scription@ operating income@ additional paidin cap ital@ owners equity@ net income@ operating income> Conclusion : &er %-%1-2%2; capital transactions that incur no future corporate o$ligations should $e excluded from calculating net or operating income> Dhus; the forfeited cash should $ecome part of additional paidin capital a$out any required disclosures for such transactions> Case 9: Eowland !ppliance Stores offers customers purchasing its appliances separately priced Eowland services these extended warranties> 6ts customers can receive no refunds for not using these warranties; and; of course; Eowland must honor these contractsregardless of any future costs in doing so> 6t also "trac0s# the profits and losses these types of warranties generate $y appliance categoryin order to help maintain a competitive price and costing structures> ?ow should Eowland recogni+e the revenues and expenses of such extended warranties9 Case 9 Solution: 0rolem !denti#ication : ?ow should a company recogni+e revenues and expenses associated with separately priced; extended warranties9 Such contracts generally are eywords : Eoss contingency@ nonrefunda$le
Conclusion : &er '-%2-2%3; such extended warranties constitute "product maintenance contracts;# where Eowland agrees to perform certain agreedupon services to these products for a specific time period> !s such; it should recogni+e revenue on a straight line $asis over the contract period; unless sufficient historical evidence indicates a superior alternative method of doing so> Eowland should also "match# any related costs in the same time period as the associated revenues> /oreover; Eowland should recogni+e a loss on such contracts that have an expected net cumulative loss over the remaining contract periods> Further information on this topic also appears in %-2--%3 and '- 1-2%%@ F!S Concepts Statement Bo> %; pars> )3 and )@ and F!S Concepts Statement Bo> '; par>1*(> Case : !s of Ganuary 1; the Eohse Company owes the First !r$or an0 3%-;--- which is due on .ecem$er 31> Since Eohse seems una$le to repay the note; the $an0 agreed that Eohse can "settle# this $alance $y agreeing to ma0e four; annual installments on each of the next four years; provided that it adds a "due on demand# clause to the note> Specifically; the lender will "do its $est# not to call the note "provided that no adverse significant shift in operations occurs>H ?owever; First !r$or an0 has the sole discretion to ascertain if these adverse conditions arose; and then to call the note due immediately> ?ow should Eohse account for this a$ove situation9 Case Solution: 0rolem !denti#ication: ?ow should a company account for notes paya$le containing a "due on demand clause# and $oth a short and longterm schedule of payments due9 eywords: .ue on .emand@ Botes &aya$le@ Classification of 5$ligations@ 6nstallments> Conclusion: &er (-1-%* and 1-; notes that are "due on demand# should $e considered as a current lia$ility ?owever; if Eohse expected to refinance this note on a longterm $asis Case ;: 5n Ganuary 1; the Chin Company agreed to purchase all of Gac0 Gac0sons interest in the company for 3- per share> Gac0; who owns 1%Iand a controlling interest of Chinpreviously threatened to engage in a hostile ta0eover attempt of Chin> For the last two years; Chins stoc0 traded from a$out 1223reaching 23 on .ecem$er 31 of last year> ?ow should Chin record this transaction9 Case ; Solution: 0rolem !denti#ication: .o "greenmail# payments constitute treasury stoc0 transactions9 Should Chin assign any "premium# to acquiring Gac0sons controlling interest in the Company; and; if so; how much should it assign to the "greenmail# premium9 eywords: Dreasury Stoc0@ reenmail@ Capital Stoc0@ Capital Dransactions>
Conclusion: &er %-%3-2%3; companies often pay "premiums# !n entity offering a higher purchase price than the open mar0et price should allocate some portion to the unstated rights or privileges and give separate accounting recognition> Case <: o ro0er Company charges a fee for $ringing together the !cme Construction Company and the First an0 Company> Dhe parties agree that o earns her fee when !cme and First "agree# to the terms of the construction mortgage> ?owever; o can receive four types of documents to "settle# this matter: o as0s the accountant when to recogni+e revenues under each of these four scenarios> Case < Solution: 0rolem !denti#ication: 8hat circumstances must exist for an entity to recogni+e incomeespecially regarding the issue of when it can "control# the events leading to recogni+ing revenue9 eywords: Revenue recognition@ construction industry@ commitment letter@ contingency> Conclusion: &er %-2-2%3 o should recogni+e the revenues for each of the four cases as follows: Case 7: Games 5lds $uys a fouryear; 1;---;--- certificate of deposit from the Second Bational an0> Games will receive %I interest in year 1@ %>%I in year 2@ 'I in year three@ and '>%I interest in year > 6f Games "redeems# this certificate $efore the maturity date; he would receive a cumulative >%I annual rate of interest of >%I> Dhe an0 has ascertained that less than one percent of its depositors redeem their certificates $efore the maturity date> Dhe $an0 as0s its accountant how to accrue and measure such interest payment o$ligations> Case 7 Solution: 0rolem !denti#ication: Should the an0 recogni+e the future interest costs $y: <1= accruing interest J %I for the first year; %>%I for the second year; 'I for the third year; and '>%I for the third year; plus appropriate compounding factorsand de$it interest expense and credit interest paya$le for these $onds9 5r; instead; should the an0
determine the total interest that Games is slated to receive at the end of the term of the $ond; and accrue a pro rata share of this amount for each month of the fouryear term of the $ond9 eywords: ond amorti+ation and discount@ contingent lia$ility@ interest expense> Conclusion: &er %-2-2%1 and 3; since only a remote possi$ility of early withdrawals exists; the an0 should use the a$ove; monthly pro rata approach to recogni+e the interest due to Games> Case =: 5n Ganuary 1; year 1; /elvin Corporation promises to "unconditionally# transfer a $uilding that cost 1--;--- !s of .ecem$er 31; year 2; /elvin still has not transferred title to the $uilding; although it received title to the $oat> ?ow should Kivian and /elvin record these transactions9 Case = Solution: 0rolem !denti#ication: !t what value should Kivian and /elvin recogni+e li0e andLor nonli0e 0ind exchanges9 Should the parties recogni+e this transaction $efore Kivian receives title to the $uilding9 eywords: Ei0e0ind exchanges; nonmonetary transactions@ $arter transactions@ contri$utions recognition@ revenue recognition> Conclusion: &er the provisions of )%1-3-1; for "different# types of assets exchanged; $oth parties should recogni+e the acquired assets at their fair mar0et value Since Kivians transaction seem more recent and o$,ective than /elvins; the 2%-;--value seems more appropriate> *%)'-%2%); a donee receiving an unconditional promise to receive an asset should recogni+e it as a receiva$le Dhus; Kivian should recogni+e the 2%-;--- receiva$le; unless reasona$le; contrary evidence arises that she should recogni+e some "allowance for uncollecti$les# for the possi$ility of not receiving it> Case >: ?er$ Construction Company is $uilding a hotel for speculative purposes> Dhat is; the Company has not yet found a $uyer for the hotel; $ut expects to do so within a few months> ?er$; who expects to spend a$out another two years to complete construction of the hotel; as0s his accountant if interest and property taxes associated with this construction site should $e capitali+ed or expensed> !t what rate of interest should ?er$ use; if any; to capitali+e any interest costs9 Case > Solution: 0rolem !denti#ication: Should property taxes and interest during construction of a hotel $e capitali+ed or expensed9 8hat rate of interest should $e used to capitali+e any interest costs9 .oes the fact that no present $uyer for the pro,ect does not exists affects he results derived9
eywords: &roperty taxes@ interest: capitali+ation@ construction> Conclusion: &er (2-3-%3; property taxes paid for property under development for use or sale can $e capitali+ed $ut is usually treated as a period expense> !ssets constructed for sale are considered qualifying assets for interest capitali+ation per )3% 2-1%%> &er )3%2-3-3 through 3-; ?er$ should use a rate of interest that can $e "directly# associated with the pro,ect under construction> 5r a weighted average of rates applica$le to other de$t that ?er$ has incurred Case 6?: 6n order to help induce Gill regory to remain as president of the Reed Company; in 2--- it promises to pay her Reed wants to properly record this transaction as deferred compensation; $ut is unsure of how many years it should use to amorti+e this cost> /oreover; Reed also purchased a "whole life# life insurance policy for Gill; naming the company as the sole $eneficiary> Reed wants to ascertain if it can offset the cash surrender value of the policy against the a$ove deferred compensation lia$ility> Case 6? Solution: 0rolem !denti#ication: ?ow many years should $e used to amorti+e deferred compensation9 Can a company offset the cash surrender value of the policy against deferred compensation lia$ility9 eywords: .eferred compensation@ purchase life insurance> Conclusion: &er the provisions of (1-1-2%*; the future payments should $e amorti+ed over the 1% remaining years of the contract> /oreover; per 32%3-3%1 through 3%'; Reed should report changes in the cash surrender values of life insurance policies as offsets to insurance expense costsnot as reductions in deferred compensation> Case 66: Dhe ootsie ?olding Company has sales exceeding 1- $illion and each of its three; whollyowned su$sidiaries has sales exceeding 2 $illion> Dhree years ago; the su$sidiaries had "complex# capital structuresuntil ootsie acquired them> ootsies annual report shows its consolidated income and individual income statement accounts of each su$sidiary company> Should ootsie also report separate earningspershare $alances for the three su$sidiary companies9 Case 66 Solution: 0rolem !denti#ication: Should wholly owned su$sidiaries report separate earnings per share $alances9 eywords: 4arnings per share@ earnings per share: applica$ility>
Conclusion : &er 2'-1-1%2; companies whose securities are traded pu$licly ?owever; wholly owned su$sidiaries need not do so Case 68: Eeila Company $egan an operating lease arrangement with .e$co 6ndustries; which was slated to $egin on Ganuary 1; at monthly lease payments of 1-;---> ?owever; .e$cos negligence prevented Eeila from moving in on timesince it failed to clean up the place adequately enough to earn a Certificate of 5ccupancy from the township> Dhus; on Ganuary 1; Eeila spent %;--- for leasehold improvements; which ena$led her to o$tain the needed Certificate of 5ccupancy on !pril 1> 6n any event; Eeila paid .e$co all the required 3-;--- lease payments and has decided not to pursue legal action for the "unready# $uilding> ?owever; can Eeila defer the 3-;--- Ganuary/arch lease payments over the remaining 33 months of the lease contract9 Case 68 Solution: 0rolem !denti#ication: Can a lessee defer portions of an operating lease payment for conditions $eyond its control9 6>e>; do the periods of an operating lease $egin when the payments are made or when the lessee ta0es operating control of the asset9 eywords: 5perating lease@ leasehold improvement@ capitali+ation of interest i>e>; the physical period that rental property is availa$le for use for the lessee serves as a $etter indicator of the amorti+ation period of the rental contract than any payment period > Bext; )-3-2%3 states that lessees should account for scheduled rate increases over the time that the lessee ta0es possession of or controls the property> )3%2-1%2 also considers the time needed to get property ready for its "intended use# as the prime criteria to ascertain the capitali+ation period> Dhus; Eeila should amorti+e the 3-;--- over the remaining 33 months of the lease> Case 69: !fter the Gulie Company issued its previous years financial statements; it noticed that it incorrectly calculated depreciation expe nse and; thus; disclosed this fact as a prior period ad,ustment in its current years financial statements> = ?owever; Gulie did not issue comparative financial statements in the current year> Gulie now wonders how to disclose this prior period ad,ustment in its current years Statement of Cash Flows> Case 69 Solution: 0rolem !denti#ication: ?ow should a company disclose prior period ad,ustments in its Statements of Cash Flows9 eywords: &rior period ad,ustments@ retained earnings@ Statement of Cash Flows>
Conclusion : &er 2%-1-%-*; Gulie should disclose the effect of a prior period ad,ustment /oreover; per 23-1-%-3; Gulie should also disclose information a$out investing and financing activities that did n ot result in cash receipts for the current period> Dhus; Gulie should also disclose the differences in the account $alances of the two consecutive $alance sheets $oth in the statement of cash flows and in an appropriate footnote> Case 6: Dhe ?eather Companys fiscal year ends on Gune 3-> 6ts employees !n employee not ta0ing hisLher earned sic0 days would receive payment thereon on .ecem$er 31 of that year> ?ow should ?eather record and measure such a lia$ility as of Gune 3-th9 Case 6 Solution: 0rolem !denti#ication: Should ?eather recogni+e any lia$ility for the a$ove potential contingency; and; if so; how should it measure and record it9 eywords: Contingency@ compensated a$sence@ matching concept> Conclusion: &er (1-1-2%1; if : Dhese conclusions follow "reasona$le# and "pro$a$le# criteria of SF!S Bo> %; pars> % and 22; which also require measuring the past "history# of employees using these $enefits g>; also consider employee turnover=> 6n this a$ove; relatively simple example; an employee who used four days of vacation would $e "entitled# to eight more i>e>; the $alance that ?eather must accrue> ?owever; if; the employer plan were $ased upon an accrual concept; it would pro rate the unta0en days for the remainder of year> Case 6;: !lex Corporation is planning this year to present comparative income statements $ut only the current years $alance sheet> Games Gohnston; president of !lex Corporation requests your advice as to whether comparative cash flow statements for $oth the current and prior periods are necessary considering only the current years $alance sheet is presented> !re there any authoritative pronouncements that address this issue that you could present to /r> Gohnston9 Case 6; Solution: 0rolem !denti#ication: Dhe issue is whether comparative cash flow statements are necessary when comparative income statements are presented; $ut only a single year $alance sheet is also presented> ey @ords: comparative statements; cash flow statements
Conclusion: 23-1-1%3 states that a $usiness enterprise that reports $oth financial position and results of operations shall also provide a statement of cash flows for each period for which results of operations are provided> Dherefore; comparative cash flow statements need also $e presented> Case 6<: ! new client for your firm is Sam Gones who is preparing personal financial statements for a $an0 loan> /r> Gones is attempting to list his social security $enefits to $e received $ased on his future life expectancy as an asset on his financial statements> /r> Gones states that such $enefits meet the definition of an asset> 8ould you agree to allow the social security $enefits to $e listed as an asset9 Case 6<: Solution 0rolem identi#ication: Dhe issue is whether social security $enefits to $e received $ased on ones future life expectancy should $e considered an asset on personal financial statements> ey @ords: assets; personal financial statements Conclusion: 2(1-3%11 states that nonforfeita$le rights to receive future sums must meet certain criteria to qualify as an asset> 5ne criteria states that the rights must not $e contingent on the individuals life expectancy or the occurrence o f a particular event; such as disa$ility or death> Since social security $enefits are contingent on ones life expectancy; such $enefits do not qualify to $e listed as assets on ones personal financial statements> Case 67: !l$right 6nc> has recently issued a 1-I stoc0 dividend to its existing stoc0holders> !s a result of the issuance of the stoc0 dividend the mar0et price of the stoc0 declined 2%I> !l$right has requested your assistance as to treating this stoc0 dividend as a stoc0 split> 8ould this $e accepta$le under !!&9 Case 67: Solution 0rolem identi#ication: Dhe issue for this case is whether a 1-I stoc0 dividend that reduces the mar0et price of the stoc0 can $e accounted for as a stoc0 split> ey @ords: Stoc0 dividends; stoc0 splits Conclusion: %-%2-2%1 through 2%3 state that to treat the 1-I stoc0 dividend as a stoc0 split; !l$right would need to demonstrate that the additional shares issued is large enough to materially influence the unit mar0et price of the stoc0> Case 6=: ?ori+ons 6nc> has agreed to sell an investment in a su$sidiary that has $een accounted for on the equity method of accounting to a minority stoc0holder in exchange for the stoc0holders share in ?ori+ons> Since the fair value of the investment exceeds its $oo0 value; ?ori+ons C45 is considering recogni+ing a gain on the exchange> ?owever;
the new CF5 at ?ori+ons is recommending to the $oard of directors that the excess from the exchange $e accounted as a credit to equity> ?ori+ons turns to you for adviceM Case 6=: Solution 0rolem identi#ication: Dhe pro$lem under review in this case is whether a gain on a nonmonetary exchange can $e recorded> ey @ords: Bonmonetary exchange; nonmonetary asset; or nonreciprocal transfer Conclusion: )%1-3-1 states that a transfer of a nonmonetary asset is a nonreciprocal transfer and should $e recorded at the fair value of the asset transferred; and that a gain or loss should $e recogni+ed on the disposition of the asset> A*4ANC* ACCO2NT!N3 Cases Case 6: Rosie Corporation has (-I of the outstanding voting stoc0 of Smith Corporation and 1-I of the voting stoc0 of Dommy Corporation> Smith also ,ust spent 1-;--- to acquire 2-I of Dommys voting stoc0> Smith has issued irrevoca$le letters of credit to guarantee Dommys notes paya$le> 6n the current year; Dommy lost 1--;---> ?ow should the parties report the a$ove arrangements in its consolidated financial statements9 Case 6 Solution: 0rolem !denti#ication: ?ow should guarantees among related <$ut not fully owned= parties $e disclosed in $oth their consolidated and separate financial statements9 eywords: Control@ consolidated financial statements@ related party transactions@ gain and loss contingencies> Conclusion: First; Smiths share of Dommys net losses <2-I of 1--;--- N 2-;---= exceeds its cost $asis of Dommy <1-;---=> &er 3-3-2%1; entities should normally not recogni+e gain contingencies> Dhus; the guarantee should not $e recogni+ed in Rosies or Dommys financial statementsother than through disclosures in the footnotes> Similarly; per )1-1-%(; in the unusual case in which losses applica$le to the minority interest in a su$sidiary exceed the minority interest in the equity capital; such excess should $e charged against the ma,ority interest> &er )1-1-%21; losses excess; and any further losses; shall $e attri$uted to those interests even if that attri$ution results in a deficit noncontrolling interest $alance>
Case 8: Goe roc0 owns 1-;--- of the '-;--- outstanding shares of ig Corporation@ Eeslie Ross own 2-;--- shares@ /ar0 Gones and his twin $rother Sam each own %;--shares@ and a$out 3-- other shareholders own the remaining 2-;--- shareswith no one other shareholder owning more than 1;--- shares> !ccording to the provisions of SF!S *; since Eeslie owns half of the outstanding shares; he; in general; "controls# ig
Corporation and; thus; should consolidate his interest with that of the corporation> ?owever; Goe roc0 is unhappy with /ar0s management decisions and plans to "challenge# his authority> 8hat factors arise in considering if a minority investor can maintain such control or even prevent others from exercising such control9 Case 8 Solution: 0rolem !denti#ication: Can corporate control rest with others $esides the ma,ority owner9 8hat factors should we examine to ma0e such a determination9 Should we separately analy+e situations where the minority shareholder see0s actual control; or g>; ma,ority shareholder= from exercising this control9 eywords: Consolidated financial statements consolidation Conclusion: &er )1-1-2%1 through 2%1; deciding if a minority shareholder can "overcome# the presumption that the ma,ority shareholder maintains this control depends on many facts and ,udgments> First; can the minority shareholder participate; veto; or cause certain operating ordinary operating g>; which $an0 to hold corporate assets= e>; which it calls protective rights= and longterm g>; who sets top managements salary and which tender offer to acquire the company to accept= e>; which it calls participating rights= management decisions to occur> 5ther factors include restating prior years financial statements if control passes to the minority shareholder@ and does the minority shareholder control technology or customers of crucial interest to the company> Case 9: Dhe Dreasury .epartment of .rof /otors invests "excess# funds daily g>; in foreign currencies=> 6t; thus; earns profits and losses; which are included in the companys consolidated financial statements> Should .rof consider its Dreasury operations as a Conclusion: &er 2)-1-%-1 all operating segments can $e reported separately if they meet the guidelines: it generates revenues and expenses that a corporate decisionma0er reviews; and has discrete financial information availa$le> ?owever; management should also $elieve that such additional information can contri$ute to outside readers and users $etter understanding the enterprises operations> Case : Dhe uiltwell Construction Company is $uilding a hospital for a third party> !s such it $orrows su$stantial funds from a foreign $an0 and repays the required interest costs as scheduled> uiltwell also incurs some foreign currency truncation ga ins and losses on these transactions> uiltwell properly amorti+es the interest costs over the life
of the construction pro,ect; $ut would now also li0e to amorti+e the associated foreign currency transaction gains and losses as well> Can uiltwell amorti+e such costs9 Case Solution: 0rolem !denti#ication: Should a construction company amorti+e or expense the gains and losses of foreign currency transaction gains and losses expended while a $uilding was under construction9 eywords: Foreign currency translation@ capitali+ation Conclusion: !lthough uiltwell apparently correctly amorti+ed interest costs during constructionper the provisions of )3%; it can not amorti+e such foreign currency transaction gains and losses> &er )3-2-3%1; increases or decreases in expected functional currency cash flows $ecome foreign currency transaction gains or losses; i>e>; "period costs># Case ;: Dony Computer Services Corporation trades %-I of its common stoc0 for the rights to certain computer programs of the Ganet Corporation> Ganet previously expensed such costs of developing these computer programs> Dony concurrently sold the other %-I interest in its stoc0 to the Geannette Company for 1;---;---> Dony later acquired another the rights to the Odder Computer Companys computer programs in exchange for stoc0 valued at 1;%--;---> Dony; thus; de$ited 6nvestments in Su$sidiaries and credited 4arnings for 1>% million to reflect this latest transaction> ?ow should Donys consolidated financial statement reflect the value of the expensed computer programs9 Case ; Solution: 0rolem !denti#ication: Should Dony recogni+e the "value# of the acquired computer programs; or should these results $e consolidated; i>e>; eliminated9 eywords: 4quity method of accounting@ intercompany gains and losses> Conclusion: &er )1-1-%1); for fiscal years after .ecem$er 1%; 2--); complete elimination of intercompany income and loss is consistent with consolidated financial statements> Dhe elimination of the intercompany income or loss may $e allocated equally $etween the parent and the noncontrolling interest> /oreover; Dony should ascertain that the 1>% million stated value of the stoc0 issued for the Odder Company is appropriate; e>g>; $y using "mar0et valuation models# to test such valuations> Case <: Dhe Rich Company see0s to limit its potential exposure from future varia$le interest de$t $y engaging in a cash flow hedge> Dhus; it see0s to acquire a financial instrument that varies in price "in opposition# to Ric0s expected payments on this de$t instrument> ?owever; it is unsure of the effectiveness of this hedging instrumentsince it is unsure of the expected "timing# of such transactions> Can Rich classify this proposed financial instrument as a cash flow
0rolem !denti#ication: ?ow much detail must a company have a$out proposed hedging activities in order to categori+e them as such9 eywords: ?edging@ interest rate swaps@ financial instruments> Conclusion: )1%2-2%1 lists the criteria whereas )1%2-2%2 through 2%132 list specifics to fulfill 2%1> )1%2-2%1 requires that at the inception of the hedge the company must document the ris0 $eing hedged and how it will assess the effectiveness of the hedging instrument> Dhus; if the Company can not document the time period the forecasted transaction that it wants to hedge is expected to occur; and the nature of the associated asset or lia$ility involved; the transaction does not qualify as a hedge under !!&> Case 7: /errill Corporation engages in a valid cash flow hedge where it minimi+es the ris0 from varia$le interest rated de$t $y promising to issue dividend pa yments from $oth its own portfolio and its portfolio of "outside# mar0eta$le securities> Since interest payments normally are classified on the Statement of Cash Flows as 5perating !ctivities@ payments of dividends from "outside# investments are classified as 6nvesting !ctivities@ and dividend payments from its own stoc0 are financing activities; where should /errill disclose the cash flows from the a$ove transactions9 Case 7 Solution: 0rolem !denti#ication: 8here in the Statement of Cash Flows should /errill disclose proceeds and payments from cash flow hedging activities9 eywords: ?edging@ cash flow hedging@ statement of cash flow> Conclusion: &er 23-1-%2(; cash flows from derivative instruments accounted for as fair value or cash flow hedges may $e classified in the same category as cash flows from the Dhus; the cash flows should $e categori+ed into the operating; investing; and financing categoriesprovided adequate disclosures are made> Case =: 5n Ganuary 1; year 1; the !llen Company issues 1--;--- shares of its stoc0 Dhe purchase agreement also states that !llen will pay 2--;--- in year two if Batie has net income of at least --;--- in year 2> Dhere is a %-I chance Batie will meet or exceed --;--- of net income in year 2> ?ow should !llen recogni+e this transaction9 Case = Solution: 0rolem !denti#ication: Dhis "contingent# value of additional payment during a proposed $usiness com$ination as0s the researcher to o$tain a proper "value# for the proposed transaction>
eywords: usiness com$ination@ measurement date@ contingent payment> Conclusion: &er )-%3-2%%; the acquirer shall recogni+e the contingent consideration and the acquisition at the fair value N <1--;--- shares A 1-= P <->% A2--;---= N1;1--;---
3O4RN1NT AN* NOT",OR"0RO,!T ACCO2NT!N3 Cases
CAS 6:
5n Ganuary 1; the ?awaii Cancer 6nstitute has received a promise from the 5$ama Foundation to receive a $uilding that the Foundation recently appraised at 2--;---> ?owever; the $uilding cost only 12%;---> Dhe Cancer 6nstitute promised to 0eep the $uilding "permanently restricted;# i>e>; never to sell it and to use it only for its wor0 in helping cancer patients> !s of the end of the Cancer 6nstitutes fiscal year <.ecem$er 31=; no title to the $uilding was received $y the 6nstitute> ?ow should the 6nstitute record this transaction9 CAS 6 SOB2T!ON: 0rolem !denti#ication: Should a notforprofit organi+ation recogni+e assets that contri$utors promised; $ut have not yet delivered9 6f recognition is required; what must the organi+ation report9 eywords: Botforprofit; Restricted; Contri$utions> Conclusion: Recogni+e unconditional promises to receive gifts at their fair mar0et value> !SC *%)'-%3-2> Dhus; the Cancer 6nstitute should recogni+e 2--;---> Report the gift or contri$ution as permanently restricted support> !SC *%)'-%%> Opon receipt of the $uilding; the Cancer 6nstitute may need to ad,ust the valuation of the contri$ution; $ased on how the initial fair mar0et value appraisal was made> !SC *%) 31-%%> For example; if the valuation to the Foundation was $ased on the amount of future cash flows from the $uilding; the Cancer 6nstitute must ma0e an ad,ustment when it receives the contri$uted $uilding>
CAS 8:
5n Ganuary 1; the ?awaii Cancer 6nstitute has received a promise from the 5$ama Foundation to receive a $uilding that the Foundation recently appraised at 2--;---$ut cost it only 12%;---> Dhe 6nstitute promised to 0eep the $uilding "permanently restricted;# i>e>; never to sell it and to use it only for its wor0 in helping cancer patients> !fter not receiving title $y .ecem$er 3-; the 6nstitute inquired as to the status of the promised $uilding> Dhe Foundation stated that water damage to the $uilding
Dhe Foundation had initially hoped to set up a fund drive to help "clean up# the $uilding> ?owever; $oth parties have agreed that as of .ecem$er 31; this fund drive would not materiali+e and the date to receive the $uilding would remain un0nown> ?ow should the 6nstitute now record the promised gift9 CAS 8 SOB2T!ON: 0rolem !denti#ication: 8hether "permanent# reductions in the value of "promised# assets affect the notforprofit entitys valuation of "promised# assets9 eywords: Restricted contri$utions; valuation allowances Conclusion: Dhe 6nstitute should reduce its valuation for the decline in the value of the contri$uted receiva$le> !SC *%)31-%%> !fter receipt the valuation may change $ecause of the nature of the amount or prior fair mar0et value if $ased on present value>
6f the 6nstitute decides that it does not want the $uilding any longer !lternatively; if the Foundation removes the permanent restriction upon donation; the 6nstitute can place the asset as an investmentwhich it can later sell to generate funds for other purposes>
CAS 9:
5n Ganuary 1; the 5ld Down ?eart !ssociation received a 1;---;--- endowment from the Cham$er family> Onder terms of the gift; the !ssociation must permanently restrict the endowment$ut may spend up to half of the interest earned on the gift or half of all profits earned from selling such investments for operating purposes> Dhe !ssociation immediately invested the gift proceeds in some "$lue chip# stoc0s> !fterwards; the !ssociation spent half of the %-;--- dividends earned from the Cham$er portfolio for operating purposes> 8here in the Statement of Cash Flows e>; operating; investing; or financing activities= should the !ssociation report these transactions9 CAS 9 SOB2T!ON: 0rolem !denti#ication: 6n which parts of a Statement of Cash Flows should a notfor profit !ssociation disclose and classify its activities9 eywords: Statement of Cash Flows@ notforprofit organi+ation@ restricted funds> Conclusion: Dhe !ssociation should generate a statement of Cash Flows> !SC *%)23- -%2> Dhe !ssociation generated operating funds $y decreasing the cash invested in assets restricted for endowment purposes> Dhus; the !ssociation should record as investing activities the difference $etween cash used to purchase investments and cash received upon their sale>
CAS :
5n !pril 1%; the City of 5ld &ut+ invests its "availa$le# excess cash with an investment $ro0er> Dhe investment $ro0er then purchases *-day commercial paper from a set of "$lue chip# companies> 5n Gune 3-; the last day of the Citys fiscal year; the City planned to "roll over# the commercial paper when they mature> ?owever; interest rates fell dramatically in late Gune resulting in a lower value for the "maturing# commercial paper> /ore importantly; the City now expects to receive a much lower return on its investment after reinvestment> Should the City ma0e any disclosures or ad,ustments regarding these transactions9 CAS SOB2T!ON: 0rolem !denti#ication: Should a City disclose potential interest rate swings affecting $ond values9 Should the City remeasure and disclose the value of the maturing commercial paper9 6f so; what disclosures seem necessary9 eywords: Botforprofit; 6nvestments; interestearning investments> Conclusion: 4ntities need not report the effect of changing mar0et values of shortterm money mar0et investments in high quality commercial paper> !S 31; Q 22> !s such no further disclosures regarding this matter seem necessary> ?owever; the City may wish to report $oth the amount of funds invested in such securities and its plans to "roll over# these investments>
CAS ;:
/ount &leasant 4pilepsy !ssociation is a notforprofit agency> Goseph ?oward is the Chair of its Koluntary oard of .irectors> ?e is also the owner of ?oward 6nsurance Company> Dhe !ssociation rents its facilities from ?oward 6nsurance Company> Dhe Company charges the !ssociation 1- per square foot of space per month> Dhis amount is considera$ly $elow the Citys average "mar0et# rate of 1 for similar office space> Dhe rental rates have not changed during the five years that the !ssociation has occupied its present location> ?owever; no formal agreement for this rental situation exists> Goseph has "hinted# that "one day# the Company may as0 the !ssociation to significantly increase its rental payments or move to another location> 8hat disclosures; if any; should the !ssociation ma0e regarding this situation9 CAS ; SOB2T!ON: 0rolem !denti#ication: .oes a related party situation exist $etween an !ssociation and the chair of its voluntary oard of .irectors9 .oes a capital or operating lease exist for the !ssociations rental relationship9 8hat disclosures; if any; should the !ssociation ma0e regarding the lease9 eywords: Related party transactions; lease; operating lease; capital lease; disclosure>
Conclusion: Dhe /ount &leasant 4pilepsy !ssociation has a potential related party arrangement through the Chair of its oard of .irectors> Dhe !ssociation should thus disclose this informationeven though the lease terms seem quite favora$le> !SC )%- 1-%-3> ?owever; since the !ssociation engages in a monthtomonth lease e>; its non cancela$le terms are less than one year=; per; it need only disclose the terms of the lease> !SC *%)2-'-1%
CAS <:
Dhe 5a0land County ?ospital performs lots of wor0 for /edicare and /edicaid patients> Dhis results in $oth reim$ursement of certain operating costs and some p rofit> "Dransfers# among related su$sidiaries within the ?ospital also contain some /edicare and /edicaid "profits># For example; the pharmacy; nursing and anesthesiology su$sidiaries often all participate in a /edicare and /edicaid surgical operation> 8hen the ?ospital prepares consolidated financial statements; it as0s you whether the ?ospital should "eliminate# gains on such transactionsespecially if others consider such transactions as dealings with "regulated affiliates># CAS < SOB2T!ON: 0rolem !denti#ication: Should a ?ospital eliminate profits on intercompany sales and assets among "controlled# groups that participate in /edicare and /edicaid reim$ursement policies9 eywords: Consolidated financial statements@ regulation@ affiliates> Conclusion: A ?ospital should not eliminate sales to "regulated affiliates# if the sales price is reasona$le; and through the ratema0ing process; future revenues are expected to equal the sales price from the regulated affiliates use of the products or services> !SC *)-)1-%1> Since the ?ospital could receive profits on reim$ursements on intercompany sales; its financial statements should not eliminate the intercompany profits> !SC *)-1-1%2>
/edicare and /edicaid are excluded $ecause they are contractualtype arrangements $etween the provider and the government agency responsi$le to pay for the services provided> !SC *)-1-1%(> Dhus; the ?ospital should eliminate these interentity gains and losses from its consolidated statements$ut could report them in the individual group mem$ers separate financial statements>
CAS 7: Some community leaders in St> &aul; /B desire a ma,or league $ase$all team to relocate there> Dhey want to $uild a domed stadium to attract such a team> !fter as0ing the City to help finance it; the City agreed to issue Stadium onds for this capital purpose> Dhese $onds would not $ecome part of the Citys consolidated financing; reporting entity> !lso; the City would neither "guarantee# nor warrant the repayments of any proceeds> Dhe City has as0ed how to account for these proposed transactions>
CAS 7 SOB2T!ON: 0rolem !denti#ication: ?ow should the City report on the $onds issued for third parties9 eywords: .e$t transactions; de$t o$ligations; third party $onds> Conclusion: !lthough the stadium $onds are conduit $onds which $ear the Citys name; the City has no o$ligation for such de$t $eyond the resources provided in a related lease or loan with the third party> !S6 2 <6nterpretation 2=> Dhe City should merely disclose a general description of the de$t transactions; aggregate the amount of all de$t o$ligations outstanding at the $alance sheet date; and clearly indicate that the City has no o$ligation for the de$t $eyond the resources provided $y the $onds>
CAS =: Dhe City of Games has 1- million of 1-I $onds paya$le in its financial statements> Dhese $onds contain a call provision> Dhe !gent Company told the City that it will help find parties to call $ac0 the old $ond and refinance the $onds with (I interest payments> Dhe new $onds will not change the original redemption dates from the old $onds> ?owever; !gent Company demands a 1--;--- service charge for its role in these transactions> 8hile the City Council recogni+es the $enefits of the p roposed services; the City is unsure how to disclose such payments when the transactions are completed> Dhus; City as0s its accountants for guidance> CAS = SOB2T!ON: 0rolem !denti#ication: Should a City disclose payments made to agents or $ro0ers who help them refinance its de$t9 eywords: Refunding of de$t@ de$t defeasance> Conclusion: Dhe City must disclose the "old# and "new# cash flows generated $y such refinancing and the resulting net savings e>; economic gain or loss=> !S 11; Q (> ?owever; requires ma0ing additional disclosures regarding additional payments to escrow agents> !S 11; Q 22 Dhus; the City should disclose any payment made to the !gent Company>
CAS >: Dhe City of /all uses a Gune 3-th yearend> 5n /arch 1; the City hired Fran0 Sears as its City /anager at an annual salary of 1--;---> Fran0li0e all other employeesearns 12 vacation days per year for the first 1- years with the City> Dhereafter; he earns 1) vacation days per year>
4mployees who leave the City receive payment for all vested; unused vacation days> ?owever; all employees must wor0 for at least six months $efore they can ta0e any vacation days> Dhe City $elieves that Fran0 will $e an excellent employee and assumes
that he will wor0 past the required six months> Should the City accrue vacation time for the City /anager9 CAS > SOB2T!ON: 0rolem !denti#ication: Should the City accrue vacation time for an employee who has not yet vested the necessary time to earn vacation time9 eywords: Compensated a$sences; Kacation pay; and vesting> Conclusion: Fran0s continued employment with the City is $eyond the Citys control> Some employees leave $efore vesting their vacation time> Dhus; the City should not accrue vacation $enefits> !S 1'; Q (> !fter six months; to $etter match the vacation accrual expense; ma0e a priorperiod ad,ustment in the current period> Dhis ad,ustment is made even if this amount is immaterial>
A2*!T!N3 Cases Case 6: 6n year 1; Goe Gosephs; C&!; reviewed Eander Companys financial statements> ?owever; in year 2; the Eander Company hired Dom ?olstrum; C&!; to audit its financial statements> Should Dom meet with Goe; and would Goe $e considered as a predecessor auditor9 Case 6 Solution: 0rolem !denti#ication: 6s a C&! who reviewed prior period financial statements considered as a predecessor auditor9 eywords: Review; predecessor auditor> Conclusion: S!S Bo>) ?owever; Footnote 3 of this authoritative pronouncement states that C&!s performing compilations and reviews are not predecessor auditors> Bonetheless; Dom may still wish to meet with him to discuss "pro$lem# encountered during this review engagement> Case 8: 6n Dom ?olstrums audit of the Eander Company; Dom see0s to o$tain an attorney representation letter regarding any; undisclosed potential corporate lia$ilities> Gohn 4ngle; the Eander Company eneral Council responded to this letter $y citing !merican ar !ssociation 4>g>; the letter uses such phrases as "it would $e inappropriate for this firm to respond to such general inquiries# and "we can not comment upon the adequacy of the companys listing; if any; of unasserted possi$le
claims or assessments># .o such responses constitute limitations in the scope of the audit9 Case 8 Solution: 0rolem !denti#ication: .o attorneys citing !! language a$out the adequacy or inadequacy of client legal representations impairs the scope of the C&!s audit services9 eywords: Eegal lia$ility; unasserted claims@ attorney representation letter> Conclusion: !ccording to the !6C&!s 6nterpretation of !O Section 33( 31=; such responses are not limitations to the auditors scope of engagement> /oreover; the !! has advised attorneys that; under certain circumstances; attorneys should inform the C&!s of certain; pending litigation that could impair the "reasona$leness# of the presented financial statements> Case 9: /ary ?oward; C&!; has long audited the 8heat City rain Companys financial statements> /uch of 8heat Citys assets consist of wheat stored in three of its grain elevators; and the Company maintains perpetual inventory records of the quantity of wheat stored there> Concurrently; on a surprise $asis; at different times each month; state grain inspectors also "count# the quantity of wheat found in these elevatorsand have found no material differences in the perpetual records for the five years that they have performed this function> Do save $oth time and audit fees; /ary wants to rely on the state inspectors counts instead of her ma0ing independent counts thereof> Can /ary do this9 Case 9 Solution: 0rolem !denti#ication: Can a C&! rely on an o$,ective; independent third party e>; part of a government agency= to su$stitute required generally accepted auditing procedures e>; o$serving the counting of the clients inventory=9 eywords: Reliance on specialists@ inventory o$servation@ outside inventoryta0ing firm@ independence> Conclusion: First; the concept of independence requires the C&! not to su$ordinate his or her ,udgment to an outside party> Bext; S!S Bo> (3; pars> ) and 12 ) 12=; require auditors to $oth review the qualifications and independence of the specialistand to ma0e appropriate tests of the data the specialist provided> Furthermore; S!S Bo> %); pars> %' % '= allow the C&! to rely heavily on such reportsalong as it does not su$stitute for the C&!s own wor0> Case : !aron Gones; C&!; is auditing the current years financial statements of Eow Company; a pu$licly traded company> !aron notices some ma,or fluctuations in Eows fourth quarter of the previous years financial statement $alances> ?e is aware that security holders of pu$licly traded company stoc0 that does not separately report fourth quarter results often "impute# such results $y su$tracting data $ased on third quarter interim $alances from the yearend $alances> Dhus; 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> !aron notices that Eow ma0es such disclosures; $ut is unsure if his firm should audit these additional; supplementary disclosures> Case Solution: 0rolem !denti#ication: 6s it mandated that the C&! audit supplementary fourth quarter disclosures of pu$licly traded companies9 8hat other steps should the C&! perform in this regard9 eywords: !ssociation with the financial statements@ interim reporting@ auditor independence> Conclusion: !O Section *%-; pars> % ?owever; the auditor should ascertain that management ma0es this separate disclosure; in which case the auditor can as0 management if it wants him or her to audit or review it> 6n most cases; the auditor would state that such information was "unaudited# or "not covered $y the auditors report#> /oreover; if management refuses to ma0e such a disclosure; this "exception# is not material enough to warrant the auditor modifying his or hr "unqualified# opinion> Case ;: Goe Gosephs; C&!; issued an unqualified audit opinion for the Gohnson Companys previous years financial statements; which used a modified accrual $asis of accounting; which is considered as an other comprehensive $ase of accounting <5C5!=> 6n the current year; Gohnson switched to Should Goe require the restatement of the prior years financial statements using this new $asis of accounting; and what disclosures; if any; should $e made to the financial statements and Goes audit report9 Case ; Solution: 0rolem !denti#ication: .oes a change in the $asis of accounting warrant a restatement of the prior years financial statements; changes in the current years footnotes; or modifications to the auditors report9 eywords: !uditor report@ consistency@ other comprehensive $asis of accounting@ Conclusion: S!S Bo> %); par> 1' 1'=; states that the auditors report should alert financial statement readers a$out any lac0 in consistency of presented financial reports> /oreover; S!S '2; footnote 3% Dhus; Goe should 6t should also disclose the effects of this change in accounting principle on last years $alances in its financial statements and footnotes
Case <: ?ugo Crossman; C&!; issued a review statement for the COB Company for last year and a compiled statement for them in the current year> .uring the current year; ?ugo purchased some COB securities; which made him lose his independencea fact noted in his C&! compilation report> Bow; the COB Company management wants ?ugo to issue comparative two year financial statements Can ?ugo reissue his review report now that he is no longer independent of the COB Company9 Case < Solution: 0rolem !denti#ication: .oes a su$sequent lac0 of C&! independence impair his or her a$ility to reissue prior years financial statements when independence was not an issue9 eywords: 6ndependence@ compilation@ review@ comparative financial statements Conclusion: SS!RS 2; par> ) states that a continuing accountant who performs a "lower# level of service in a su$sequent period can reissue the prior report> Dhe accountant should; include a separate paragraph attached to his or her latest report that indicates this new; lac0 of independence and indicate that he or she performed no "update# procedures since last issuing the review report> Case 7: Goseph Gosephs; C&! is auditing the 4lder Companys current years annual financial statements and notices that the Company has violated the 2>1 to 1>- current ratio requirements as part of its de$t agreement with the Sunshine an0> Dhe companys current ratio is 1>)% to 1> 4lders management $elieves Bonetheless; the $an0 has the "right# to call in the entire 2 million loan> ?owever; Goseph is not so sure and must issue his report $efore this grace period expires> Should Goseph qualify his opinion or demand that 4lder reclassify this loan as a shortterm lia$ility; in light of the a$ove circumstances9 Case 7 Solution: 0rolem !denti#ication: .oes this present violation warrant reclassifying the loan from a long to a shortterm lia$ility9 Should Eander ma0e any additional footnote disclosures9 Should Goseph modify his audit report accordingly9 eywords: Calla$le de$t@ audit reports Conclusion: &er the F!S Codification (-1-%11; 4lder needs to receive a waiver from the creditor or develop other evidence that the $an0 will not call this loan> Dhese circumstances do not appear to $e an uncertainty Dhus; if Goseph disagrees with 4lders decision; he should issue a qualified <"except for#= or adv erse audit opinion> Case =: .uring Goseph Gosephs; C&!; audit of the elton Companys prior years financial statements; he notices that sales and profits have fallen dramatically from their previous year highs> ?is su$sequent
that he spent much less time in the previous year with the $usiness than he did in prior years> ?e agreed to refund 1--;--- of his 1 million previous years compensation immediately; and Gohn and Gill agreed that he would receive his original 1 million compensation in future years Goseph then reduced the elton Companys previous years salary expense for the 1--;--- refund; since the parties attri$uted these transactions to previous years events> ?e then issued the audited financial statements on /arch 2; of the current year> ?owever; on /ay 2; of the current year; the Sunshine $an0 called him and as0ed him to attri$ute the 1--;--- to the current years events Should Goseph require the recall and reissuance of the previous years financial statements9 Case = Solution: 0rolem !denti#ication: 8as Gohns 1--;--- refund of "overcompensation# a prior year or current year event9 6f it were a current year event; should the parties recall and reissue the prior years financial statements9 eywords: !udit reports@ su$sequent events@ matching principle> Conclusion: &er !O Section %'-; a "Dype 6# su$sequent event provides additional information that occurred on the entitys $alance sheet date; and a "Dype 66# su$sequent event consists of information arising past the $alance sheet date> Dype 6 events can $e ignored in the current period or placed as a footnote to the financial statements> !O Section %'1 states that auditors su$sequently $ecoming aware of significant Dype 6 su$sequent events may need to recall and reissue previously issued reports> !ssuming that the 1--;--- was material; the issue $ecomes if the refund was made due to prior year or current year events> iven the evidence presented; the parties made the decision in the current year $ased upon the prior years facts and transactionsand used "good faith# to do so> Dhus; no ad,ustments seem necessary> Case >: Goseph Gosephs is completing his audit of the olton Companys current years financial statements and reads in S!S 11 ut; despite many requests for many years; olton has esta$lished no such committeeprimarily since it has only two stoc0holders> 8hat should Goseph do now9 Case > Solution: 0rolem !denti#ication: .oes the lac0 of an Since olton does not have a corporate governance $ody; Goseph need Dhis fact will not impair him from completing the audit> ?owever; Goseph may well
suggest g>; as part of his letter of reporta$le conditions= Case 6?: ou are auditing the financial statements of !ir Service 6nc>; an airplane wholesaler that purchases various types of corporate ,ets for sale to different companies or individuals> &rior to the sale of an airplane; !ir Service utili+es the ,et for charter service> 6n reviewing the financial statements; you noticed that !ir Service reports these ,ets $efore selling them as part of fixed assets and depreciates such planes> Dhe engagement partner questions such accounting and requests that you research this issue as to the proper treatment for these ,ets used in the chartering service> Case 6? Solution: 0rolem !denti#ication: Dhe issue in this case is how the planes used in the chartering $usiness should $e accounted foreither as inventory or fixed assets which should $e depreciated> eywords: 6nventory; assets held for sale> Conclusion: &er the F!S Codification the "definition of inventory# one would conclude that the primary use of the ,ets would determine their treatment in !ir Services financial statements> Since the ,ets are held primarily for sale; and the chartering is only a temporary use; the ,ets should $e listed as inventory
TA5 Cases !nstructions: 6n writing a tax memo $egin the discussion of the law with at least one paragraph on the relevant Code language> &inpoint the location of the relevant language in the Code as precisely as possi$le> Dhen add a paragraph Dhen descri$e any relevant cases or Revenue Rulings> 8rite clearly and concisely so that the tax memo is normally limited to three pages>
8rite a memo identifying the legal 6SSO4 Ose these su$headings; as it is not enough to descri$e the law> For each C!S4 discuss and apply at least one relevant C!S4 or revenue ruling> Dhe most important aspects of the memo are the 6SSO4 statement Dhe application should integrate reference to every source of law previously discussed> .o not ,ust answer the question as0ed in the pro$lem>
CAS 6 @hen 3ross !ncome is Accrued (Dasic)
Daxpayer is a securities firm which uses the accrual method of accounting> Daxpayer executes stoc0 trades and performs settlement functions> Settlement
functions include recording the sale and confirming it with the customer> Drades made on .ecem$er 2); 2-T%; until the end of the month are not settled until Ganuary of 2-T'> Daxpayer made 1;---;--- of net commissions from these trades in late .ecem$er> Since the security is not credited to the customers account until settlement date; taxpayer wants to declare the income on the settlement dates in 2-T'> Daxpayer does not receive the money until Ganuary 2-T'> !dvise the taxpayer> !SS2:
8hether an accrual $asis securities firm has gross income under sec> %1
C5BCEOS65B: Dhe trading date is the date for 1;---;--- of gross income from the net commissions on the securities $ecause all the events have occurred then which fixes the right to receive the income> .6SCOSS65B 5F D?4 E!8: ross income under section '1 ross income is included in taxa$le year received; unless the method of accounting is properly accounted for in a different period> Section %1 Dhe accrual method generates income when all the events have occurred which fixes the right to receive such income and amount is determina$le with reasona$le accuracy> Reg> U 1>%11 Daxpayer was a securities company declaring income from trades on the settlement date> Dhe Dax Court held that sales contract on the trading date was a condition precedent that fixed the Daxpayers right to receive the income> Dhe settlement functions were conditions su$sequent; so that the settlement was irrelevant to the determination of gross income> V Charles Schwab Corp v. Commissioner ; 1-( DC 2)2 <1**'=> !&&E6C!D65B 5F D?4 E!8: Daxpayer has 1;---;---- of gross income under section '1 Dhis gross income is included in taxa$le year 2-T% $ecause it is accounted for under the accrual method of accounting> Sec> %1 Dhe accrual method generates income for the taxpayer when the trading has occurred; $ecause at that time all the events have occurred which fixes the right to receive such income and amount of commissions is determined with reasona$le accuracy> Reg> U1>%11 !s in Charles Schwab Corp v. Commissioner ; 1-( DC 2)2 <1**'=; taxpayers settlement functions were conditions su$sequent; so that the settlement date is irrelevant to the determination of gross income>
CAS 8 Dusiness *eductionsE (Dasic)
For the past two years; /insu; a Worean !merican; has wor0ed as a high school physical education teacher> ?e is also a $ody$uilder and a parttime graduate student in educational technology at State Oniversity> 6n preparing for a masters thesis he has decided to participate in !rnolds 8orld ody$uilding training program and analy+ing advanced technology used to help students a$sor$ physical education> !rnolds training program has a regular faculty; curriculum; an enrolled $ody of students; and advanced technology in its gym equipment> /insu earned ;--- during the fall 2-T% as a $ody$uilder $y coming in second in the state contest> /insu paid 3;--- in spring 2-T% for his masters degree tuition at State Oniversity for one class on advanced computer technology and another %;--- to participate at !rnolds> ?ow much can /insu deduct9 /insu 0nows a$out relevant educational tax credits and want you to focus ,ust on the deductions> CAS 8 SOB2T!ON:
C5BCEOS65B: /insu may not deduct the cost of his graduate degree or the $ody$uilding training program since /insu is not yet in the trade or $usiness when the expense arose> /insus father may not deduct any expenses; since they are not his $usiness expenses> .6SCOSS65B 5F D?4 E!8: Section 1'2 4ducational expenses are never deducti$le if the education is part of taxpayers study program that will lead to qualifying for a new trade or $usiness; Reg> U 1>1'2%<$=<3=; or if the study is required in order to meet the minimum educational requirements for qualification in the ,o$> Reg> U 1>1'2%<$=<2=> 6f the education passes these two tests then the educational expense must either <1= maintain or improve existing s0ills required in the individualXs trade or $usiness or <2= meet the express requirements of the employer to retain his or her employment status> Reg> U 1>1'2% For an employee; a change of duties does not constitute a new trade or $usiness if the new duties involve the same general type of wor0 as performed at the individualXs present employment> !lthough additional education may qualify a taxpayer for a position with new duties; the education does not qualify her for a new trade or $usiness if the new duties are in the similar type of wor0> Reg> U 1>1'2%<$=<3=> Daxpayer had graduate educational expenses in educational psychology as part of a collegeXs adult education program> Dhe education was part of a degree program that led to employment as a high school guidance counselor> Dhe Dax Court held
that these educational expenses were deducti$le $usiness expenses in Schwerm v. Commissioner ; D>C> /emo 1*)'1'> Dhe Dax Court agreed that the taxpayer was in the trade or $usiness of teaching and found that the graduate education did not qualify the taxpayer for a new trade or $usiness> !lthough the degree qualified the taxpayer for high school counseling; the court distinguished the result as merely a change of duties involving the same general wor0 of teaching and related duties> ! masterXs degree was not required to meet the minimum educational requirements for the ,o$> Dhe education in educational psychology helped the taxpayer maintain her ,o$ s0ills in education> Dhe Dax Court denied a deduction of a masters degree in social wor0 for a teacher of learningdisa$led students; reasoning that it qualified her for a new trade or $usiness of entering social wor0 fields> Reisinger v. Commissioner ; (1 D>C> %') <1*(*=> .eductions attri$uta$le to a ho$$y are deducti$le only to the extent that the gross income derived from such activity exceeds the deductions that would $e allowa$le under the tax law without regard to whether the activity is engaged in for profit> Sec> 1)3<$=<1=> !ctivities not engaged for in profit are defined with nine criteria in Reg> U 1>1)32> ?o$$y expenses are su$,ect to the 2I floor on miscellaneous items deductions under sec> '(<$=> &ersonal living expenses are not deducti$le under sec> 2'2 !&&E6C!D65B 5F D?4 E!8: /insus educational expenses are not deducti$le if the education is part of a study program that will lead to qualifying for a new trade or $usiness; Reg> U 1>1'2%<$= <3=> Dhe fact that the education helps /insu maintain or improve existing s0ills required in the individualXs trade or $usiness is not enough> Reg> U 1>1'2% /insus earning a masters degree in a related $ut slightly different field is similar to the taxpayer who was a teacher of learningdisa$led students and earning a masters degree in social wor0> v. Commissioner ; (1 D>C> %') <1*(*=> !pplying the rationale in Reisinger ; /insus educational technology program could qualify him for a new trade or $usiness in technology related careers> !lthough /insu might argue that he will have a mere change in duties after earning a masters degree; similar to a masters in counseling and guidance for a teacher under Schwerm v. Commissioner, D>C> /emo 1*)'1'> ?owever; Schwerm appears distinguisha$le $ecause of the threshold test that it could qualify /insu for a new trade or $usiness> !rnolds training program was an activity that appears more as one not engaged for in a trade or $usiness; applying the factors of a ho$$y under Reg> U1>1)32> Dhus; /insu deductions attri$uta$le to the ho$$y of $ody$uilding are deducti$le only to the extent that the gross income derived from such activity exceeds the
deductions that would $e allowa$le under the tax law without regard to whether the activity is engaged in for profit> Sec> 1)3<$=<1=> !lthough gym costs are normally nondeducti$le personal living expenses under sec> 2'2 '(<$=; equal to the ;--- earnings from the $ody$uilding contest>
CAS 9 StocF purchased y an employee (!ntermediate)
Sally $ecame an employee of .otismo; 6nc>; a privately held firm> 5n .ecem$er 1%; 2-T3; Sally was allowed to $uy 2-;--- shares of .otismo stoc0 for -;--dollars> 8hen Sally $ought the stoc0; each share was worth 2> .otismo retained the right to repurchase each share for 2 original purchase price if Sally leaves .otismo at any time during the next two years for any reason> .otismo stoc0 increased to % per share in .ecem$er 1%; 2-T%; when the two year restriction ended> Sally sold the stoc0 on Ganuary 1); 2-T' for * per share; after the announcement of a new patent for .otismo> !dvise Sally roughly how much tax she must pay and for what year !ssume Sally is in the 3%I tax $rac0et for ordinary income and 1%I for long term capital gains> CAS 9 SOB2T!ON:
C5BCEOS65B: !ny failure to ma0e a section )3<$= election creates gross income from the restricted stoc0 when the restriction lapsed in 2-T%> Dhe gain included in gross income is ordinary income measured $y the F/K less the purchase cost $asis> .6SCOSS65B 5F D?4 E!8: ross income includes compensation for services under section '1 '1 &roperty having a su$stantial ris0 of forfeiture which is transferred in connection with the performance of services is gross income> Dhe income is measured $y its fair mar0et value upon the removal of the su$stantial ris0 of forfeiture; less any price paid for the stoc0> U )3 Dhus; property received in connection with the performance of services is not taxed under U )3 Reg> U 1>)31 Su$stantial ris0 of forfeiture is defined as rights to full en,oyment of such property which are conditioned upon future performance of services> U )3 Dhe holding period for stoc0 having a su$stantial ris0 of forfeiture $egins when the restriction is lifted> U )3 !n election exists to include in gross income in the year of transfer> U )3<$=<1=> Dhe gross income is the excess of the fair mar0et value over the amount paid for the property> /a0e the election not later than 3- days after the transfer> U )3<$= <2=> !n employer made a stoc0 option plan availa$le for 0ey employees> Dhe O>S>
Supreme Court held that a purchase from employer for stoc0 options is compensation for services; since it is not a gift> Commissioner v. LoBe; 3%1 O>S> 23 <1*%'=> 4mployee purchased employers restricted stoc0 when the amount paid for the stoc0 equaled its full fair mar0et value> Dhe Dax Court held that section )3 applies to all restricted stoc0 that is transferred for services> Onless taxpayer elected at time of purchase to include income difference $etween purchase price and fair mar0et value; taxpayer must recogni+e ordinary income for any appreciation in value> Alves v. Commissioner ; (3 F>2d () <*th Cir> 1*)=> !&&E6C!D65B 5F D?4 E!8: Sally has gross income from compensation for services> U '1 Sallys purchase of ismo stoc0 is transfer of property in connection with the performance of services; $ecause the stoc0 was not widely availa$le for purchase> Commissioner v. LoBe; 3%1 O>S> 23 <1*%'=> Sallys stoc0 had a su$stantial ris0 of forfeiture under section )3 !ssuming that Sally did not ma0e a section )3<$= election when she purchased her employers stoc0; Sally has income in 2-T% when the rights in her stoc0 were su$stantially vested under Reg> 1>)31 6n 2-T%; Sallys gross income is '-;---> Dhis is measured $y its fair mar0et value upon the removal of the su$stantial ris0 of forfeiture; less the price paid for the stoc0 <2-;--- shares having a % per share F/K less 2 per share paid for the stoc0=> U )3 Sally must recogni+e ordinary income for the '-;--- appreciation in value> Alves v. Commissioner ; (3 F>2d () <*th Cir> 1*)=> 6n 2-T' when Sally sells the stoc0 her gross income is )-;--- <2-;--- shares times Y* per share F/K less % per share $asis <2 cost P 3 prior gain recogni+ed=> Dhe )-;--- is short term capital gain since the holding period for Sallys stoc0 starts when the restriction lapsed> U )3 Sally pays 2);- -- of tax in 2-T' ?owever; if Sally made a Section )3<$=<1= election to include in gross income in the year of transfer; then gross income is the excess of the fair mar0et value over the amount paid for the property; which was -> Sally must have made the election not later than 3- days after the transfer> U )3<$=<2=> So she does not have additional income until 2-T'; when she sells the stoc0> U '1 Dhe 1-;--gross income <2-;--- shares times Y* per share selling price less 2 $asisZ= is long term capital gain> Sally pays a$out 21;--- of taxes> <1%I EDC rate=>
CAS *eduction #or ,oreign Tra%el (!ntermediate)
Sylvia is a professor in $usiness at the Oniversity of ?awaii> She went on sa$$atical for an academic year to ta0e courses in Chinese at Bational Daiwan Oniversity in Daipei; Daiwan; to expand her 0nowledge of international $usiness
and to conduct research> 5n wee0ends and during the three wee0 winter $rea0 Sylvia went sightseeing $y herself around the island; $ut one time gave a lecture in Dainan; Daiwan> Sylvia has documented her expenses and saved her receipts> !dvise Sylvia> CAS SOB2T!ON:
C5BCEOS65B: Sylvias foreign travel expenses are generally deducti$le; $ecause she is doing more than mere travel for educational purposes> ?owever; disallow the extra traveling expenses around the island of Daiwan during the winter $rea0 and on wee0ends when she did not have a lecture to present> .6SCOSS65B 5F D?4 E!8: Section 1'2 6f travel expenses are incurred for $oth $usiness and other purposes; the travel expenses are deducti$le only if the travel is primarily related to the taxpayerXs trade or $usiness> Reg> U 1>1'22<$=<1=> Section 2( Dhe exception under sec> 2(S> is less than 2%I of the total time on $usiness> Reg> U 1>2( Dravel expenses are deemed entirely alloca$le to $usiness activity; if the individual incurring the expenses does not have su$stantial control over the arrangements of the trip> Reg> U 12( Bo deduction is allowed for travel as a form of education> Sec> 2( ! teachers extension course travel to Southeast !sia was not disallowed $ecause the courses included lectures $y university professors; tours of related sights; and significant reading assignment> Ann !orgensen; R6! DC/emo Q 2---13) <*th Cir> 2---=> Section 2( usiness meals are deducti$le $y only %-I of the cost> Sec> 2( !&&E6C!D65B 5F D?4 E!8: Sylvias travel was more than ,ust disallowed education expenses under Sec> 2( Similar to a teachers deducti$le extension course travel to Southeast courses Ann !orgensen; R6! DC/emo Q 2---13) <*th Cir>
2---=; Sylvias classes at Bational Daiwan Oniversity would include lectures $y university professors and significant reading assignment> ! $usiness purpose for Sylvias course wor0 is esta$lished $y integrating some of her new 0nowledge into her activities of teaching and researching international $usiness> Since Sylvia has travel expenses are incurred for $oth $usiness and other purposes; the travel expenses are deducti$le only if the travel is primarily related to the taxpayerXs trade or $usiness> Reg> U 1>1'22<$=<1=> Section 1'2 Sylvia need not allocate the foreign travel expenses under section 2( 2(S> is less than 2%I of the total time on $usiness> Dhus; reg> U 1>2( 6nstead; the $usiness travel expenses while Sylvias classes are in session are deemed entirely alloca$le to $usiness activity; $ecause Sylvia not have su$stantial control over the arrangements of the trip under Reg > U 1>2( Sylvias records should overcome the Section 2( Sylvia can deduct her travel; lodging and %-I of the $usiness meals> Sec> 2( CAS ; !ncome Sourcing !nternational Ta$ (Ad%anced)
?idetoshi was a worldrenowned roc0 star from BewCountry> SonyOS! Records contracted with ?idetoshi to produce records> SonyOS! Records retained all intellectual property rights in the recordings> Dhe contract granted ?idetoshi payments or "royalties# $ased upon future sales of recordings> ?idetoshi paid taxes on the payments in BewCountry as royalties> Dhe O>S>BewCountry treaty exempts royalties from tax in the O>S> ?owever; BewCountry tax treaty; did not define royalties or compensation for personal services> Dhe 6RS has told ?idetoshi; his contract with SonyOS! generates personal service income in the Onited States> !dvise ?idetoshi>
CAS ; SOB2T!ON:
C5BCEOS65B: ! recording contract generates personal service income if taxpayer has no intellectual property right; so income exists> .6SCOSS65B 5F D?4 E!8:
6n the Onited States personal service income is sourced according to the location in which the services were performed> Services performed in the O>S> are O>S> source income> Sec> )'1 Dhe "commercial traveler# exception is foreign source income if the recipient is a BR! who is in the O>S> for *- days or less during the tax year; the compensation does not exceed 3;--- for the services performed in the O>S>; and the services performed are not effectively connected with a O>S> trade or $usiness> Sec> )'3 Royalties from tangi$le property located outside the O>S> are foreign source income> Sec> )'2 Dhe location of royalties attri$uta$le to the use of intangi$le property Rev> Rul> (2232; 1*(21 C>> 2('> 6n "ngram v. Bowers; %( F>2d '% Dhe master records were used in foreign countries S> S> source=> Dhe Second Circuit Court of !ppeals determined that it was personal service income> Dhe 6RS determined that $roadcast rights in a foreign country of a live $oxing match held in the O>S> were a license; rather than a sale> Dhis resulted in the income $eing characteri+ed as foreignsource royalty income since the rights were for use in a foreign country> Rev> Rul> )(); 1*)1 C>> 1(3> ! record company contracted with Foreign Daxpayer to produce recordings> Dhe company retained all intellectual property rights in the recordings> Dhe contract granted Daxpayer "royalties# $ased upon future sales of the recordings> Dhe applica$le tax treaty; did not define royalties or compensation for personal services> Dhe Dax Court in Bole# v. Commissioner; )3 D>C> %) <1*)=; decided the contract was intended as a contract for personal services> !lthough the payments were $ased on future sales; existence of a property right of the taxpayer is fundamental for the purpose of determining whether royalty income exists> Onder applica$le ecause taxpayer performed his services in the O>S>; his income was O>S> source and taxa$le in the O>S> !&&E6C!D65B 5F D?4 E!8: ?idetoshis contract is pro$a$ly service income $ased on the cases and distinguishing revenue ruling> Similar to "ngram v. Bowers; %( F>2d '% <2d Cir>; 1*32=; the 6SSO4 is whether income received from master records was royalty income or personal service income> 6n $oth cases; while the master records were used in foreign countries;
while the records were produced in the O>S> Dhus; the same conclusion arises that the income generated is personal service income> ?idetoshis case is factually similar to Bole# v. Commissioner ; )3 D>C> %) <1*)=> 6n $oth cases; a record company contracted with Foreign Daxpayer to produce recordings> Dhe record company retained all intellectual property rights in the recordings> ecause ?idetoshi owned no intellectual property rights; no royalty payment existed; instead the recordings were compensation for services> iven that ?idetoshi performed his services in the O>S>; his income was O>S> source> Sec> )'1 ?idetoshis case is distinguisha$le from the facts in Rev> Rul> )(); 1* )1 C>> 1(3; $ecause no license or intellectual property was produced for ?idetoshi> Dhus; the characteri+ation of the income is different> ?idetoshi does not qualify for the "commercial traveler# exception when the compensation exceeds 3;--for the services performed in the O>S> Sec> )'3 Since ?idetoshis income is not royalties; so Sec> )'2 Rul> (2232; 1*(21 C>> 2('; are not applica$le>
CAS < Contingent liailities in a Section 9;6 trans#er (Ad%anced)
Tco is an accrual $asis taxpayer with multiple lines of $usinesses> 5ne $usiness is a gas station> Dhe land underneath the gas station did not appear contaminated when Tco purchased it> ?owever; the land now has potential soil and groundwater pro$lems Tco engaged in a section 3%1 tax free exchange transferring the gas station to a new su$sidiary Sco in exchange for the stoc0 of Sco and the assumption of the environmental lia$ilities> efore the transfer; Tco did not ta0e any environmental remediation efforts to clean up the lands soil and groundwater pro$lems> ?ow is the $asis of Tcos land determined9 CAS < SOB2T!ON:
C5BCEOS65B: Bo gain is recogni+ed from the contingent lia$ilities; however; they can affect shareholders $asis in the stoc0 under sec> 3%) .6SCOSS65B 5F D?4 E!8: Sec> 3%1 ?owever; gain is recogni+ed if either other property or money; 0nown as $oot; is involved in the transaction> Sec> 3%1<$=> Eia$ilities included in the transferred property are generally not considered as $oot> Sec> 3%( ?owever; gain is recogni+ed on lia$ilities transferred if the
lia$ilities exceed the ad,usted $asis sec> 3%( Sec> 3%(<$= Dhe $asis of the property received is determined under sec> 3%) ?owever; for purposes of sec> 3%) $asis; the lia$ilities assumed are treated as $oot received> Sec> 3%) Contingent environmental lia$ilities were removed under U 3%( Rev> Rul> *%(> Dhus; contingent lia$ilities assumed; would not trigger gain to the extent such lia$ilities exceeded the ad,usted $asis of property contri$uted under U 3%( Contingent lia$ility is included in the definition of lia$ility for purposes of determining whether $asis exceeds the fair mar0et value; so that a reduction in $asis should occur> U 3%) Section 3%) ?owever; sec> 3%) Sec> 3%) !&&E6C!D65B 5F D?4 E!8: Tco contri$uted property to a corporation under Sec> 3%1 Tcos lia$ilities included in the transferred property are generally not considered as $oot; Sec> 3%( 3%1<$=> ?owever; if Tcos lia$ilities exceed its ad,usted $asis; gain is recogni+ed on lia$ilities transferred under sec> 3%( Bo facts on Tco indicate that the contingent lia$ilities represent $ad purpose lia$ilities for tax avoidance purposes> Sec> 3%(<$= Dhe $asis of the property received $y Tco is determined under sec> 3%) ?owever; for purposes of Tcos sec> 3%) $asis; the lia$ilities assumed are treated as $oot received> Sec> 3%) !n exception exists for contingent lia$ilities which Rev Rul *%(; removed from section 3%( So; Tcos contingent lia$ilities assumed $y Sco; would not trigger gain to the extent such lia$ilities exceeded Tcos ad,usted $asis of property contri$uted under sec> 3%( Tcos contingent lia$ilities under Sec> 3%) ?owever; sec> 3%) Sec> 3%)
