Under SFAS No. 13, leases that do not meet one of the four criteria for a capital lease are treated as operating leases. Team Debate: Team 1: Argue for the capitalization of leases that do not meet any of the FASB ASC 840 criteria for a capital lease. Your argument should take into consideration the conceptual framework definitions of assets and liabilities. Team 2: Argue against the capitalization of leases that do not meet any of the FASB ASC 840 criteria for a capital lease. Your argument should take into consideration the matching principle and full disclosure.
> As discussed in Chapter 14, leases that are in‐substance purchases of assets should be capitalized—an asset and associated liability should be recorded for the fair value acquired. Mason Enterprises is considering acquiring a machine and has the option t
> Certified public accountants have imposed on themselves a rigorous code of professional conduct. Required: a. Discuss the reasons that the accounting profession adopted a code of professional conduct. b. One rule of professional ethics adopted by CPAs is
> In its 1990 discussion memorandum on distinguishing between liabilities and equity, the FASB posed the question, “Should the sharp distinction between liabilities and equity be effectively eliminated?” To do so would be consistent with the entity theory
> The Securities Act of 1933 and the Securities Exchange Act of 1934 established guidelines for the disclosures necessary and the protection from fraud when securities are offered to the public for sale. Required: a. Discuss the terms going public and bein
> The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms. Required: a. Discuss the various forms of disclosure available in published financial statements. b. Discuss th
> The unaudited quarterly statements of income issued by many corporations to their stockholders are usually prepared on the same basis as annual statements—the statement for each quarter reflects the transactions of that quarter. Required: a. Why do probl
> You have completed your audit of Carter Corporation and its consolidated subsidiaries for the year ended December 31, 2017, and are satisfied with the results of your examination. You have examined the financial statements of Carter for the past three ye
> Lancaster Electronics produces electronic components for sale to manufacturers of radios, television sets, and phonographic systems. In connection with his examination of Lancaster’s financial statements for the year ended December 31, 2017, Don Olds, CP
> Barbara Montgomery is a first‐year auditor for Coppers and Rose, a large public accounting firm. She has been assigned to the audit of Lakes Brothers, a clothing retailer with retail outlets throughout the United States. This audit has proved troublesome
> Eagle Company issues quarterly financial statements on September 30, 2017, and pays its GBP 10,000 account payable to John Bull Company on October 15, 2017. The exchange rates are shown in the following table: Date ………………………………………………. Exchange rate July
> Eagle Company is a U.S. corporation that uses the U.S. dollar (USD) as its reporting currency. On July 1, 2017 Eagle Company purchases office computers (capitalized assets) on account from John Bull Company for 10,000 British pound sterling (GBP). The ex
> Maxwell Company is a U.S. corporation that uses the U.S. dollar as its reporting currency. Gonzalez Company is a wholly-owned subsidiary of Maxwell Company located in Mexico, and functions as a maquiladora facility of Maxwell Company. Consider the follow
> The Securities and Exchange Commission staff has issued guidelines for companies struggling with the problem of breaking up their business into industry segments for their annual reports. The staff noted that the process is a subjective task that “to a c
> Under GAAP, cumulative preferred dividends are reported as liabilities only after they have been declared by the corporation’s board of directors. For the following debate, support your arguments by referring to the SFAC No. 6 definition of liabilities a
> A highly inflationary economy is defined as an economy that has experienced more than 100 percent cumulative inflation over the previous three years/ Required: If a country’s economy is deemed highly inflationary, when should the FSB ASC 830 guidance reg
> Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of
> Explain how current practice for consolidations is consistent with the entity theory of consolidation.
> Parent company theory is one of the two prominent theories of consolidation. Required: Under parent company theory, a. How would the value of goodwill be determined? Explain why. b. How would the initial value of non controlling interest be determined? E
> Entity theory is one of the two prominent theories of consolidation. Required: Under entity theory a. How would the value of goodwill be determined? Explain why. b. How would the initial value of noncontrolling interest be determined? Explain why. c. How
> In SFAS No. 52 (see FASB ASC 830), the FASB adopted standards for financial reporting of foreign currency exchanges. This release adopts the functional currency approach to foreign currency translation. Required: a. Discuss the functional currency approa
> Reporting forward exchange contracts continues to be a significant issue in accounting for foreign currency translation adjustments. Required: a. Describe a fair value hedge, and discuss how to account for forward exchange contracts that are entered into
> Several methods of translating foreign currency transactions or accounts are reflected in foreign currency financial statements. Among these methods are the current–noncurrent, monetary– nonmonetary, current rate, and temporal methods. Required: Define t
> The FASB has discussed certain terminology essential to both the translation of foreign currency transactions and foreign currency financial statements. Included in the discussion is a definition of and distinction between the terms measure and denominat
> A central issue in reporting on industry segments of a business enterprise is the determination of which segments are reportable. Required: a. What is a reportable segment? b. Explain how a preparer would determine which operating segments to report segm
> Boston Company has retirement plan which entitles its employees to an amount equivalent to the product of its basic salary and number of years of service at the time of retirement. Worchester Corporation also has a pension plan but its agreement with the
> Purity Company acquired all of the net assets of Soltice Company on November 1, 20x1. As a result Soltice became a 100% percent owned subsidiary of Purity. After allocating the cost of the net acquisition to the net assets of Soltice, the remainder ($100
> The Whit Company, a manufacturer, and the Berry Company, a retailer, entered into a business combination whereby Whit acquired for cash all the outstanding voting common stock of Berry. Required: a. The Whit Company is preparing consolidated financial st
> In its 1995 exposure draft, “Consolidated Financial Statements: Policy and Procedures,” the FASB proposed that a company’s outside interest (“non-controlling interest”) be reported as an element of stockholders’ equity. Current practice now requires that
> SFAS No. 160 (see FASB ASC 810) required that goodwill be measured at 100 percent of its fair value. Team Debate: Team 1: Argue that goodwill reported in balance sheets should be measured only at the value purchased by the parent company. Your arguments
> Current practice requires that the assets acquired in a business combination be measured at fair value as defined by SFAS No. 157 (see FASB ASC 820‐10). Team Debate: Team 1: Argue that the acquiring company should measure the acquired company’s plant ass
> On January 2, 2017, Grant Corporation leases an asset to Pippin Corporation under the following conditions (assume Grant has not early adopted the new lease standard): 1. Annual lease payments are $10,000 for 20 years. 2. At the end of the lease term, th
> When the FASB issues new standards, the implementation date is often 12 months from the date of issuance, and early implementation is encouraged. Becky Hoger, controller, discusses with her financial vice president the need for early implementation of a
> Oriji Company enters into a 5-year lease for 3,000 square feet of warehouse space with Donner Company for $15,000 per month. At the end of year one, Oriji Company and Donner Company agree to amend their lease contract to include an additional 1,000 squar
> Use the same facts contained in Case 13-13 to determine how Major Company should classify the lease. The following additional information is available: The fair value of the leased equipment is $42,000 Major Company’s carrying value of the leased equipme
> Minor Company enters into a lease of non-specialized equipment with Major Company. The following information about the lease and the leased assets is available: The lease term is 5 years, and there is no renewal option The economic life of the leased equ
> Arts Corporation offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that emp
> Zuella Company (lessee) enters into an agreement with Imdieke Corporation (lessor) to lease office space for a term of 60 months. Lease payments during year one of the lease are $10,000 per month. Each year, lease payments increase by an amount equivalen
> SFAS No. 158 no longer allows companies to report the SFAS No. 87 minimum liability in the balance sheet. Instead, the amount reported in the balance sheet is measured using projected benefits rather than accumulated benefits. For the following debate, r
> SFAS No. 87 required that projected benefits be used to measure pension expense, but it allowed companies to report a minimum liability on the balance sheet using accumulated benefits. The result was that financial statements were not articulated. For th
> Pension accounting has become more closely associated with the method of determining pension benefits. Required: a. Discuss the following methods of determining pension benefits: i. Defined contribution plan ii. Defined benefit plan b. Discuss the follow
> Critics of SFAS No. 87 argue that its requirements result in reporting pension expense that is volatile. One of the factors causing volatility is changing the discount rate used to calculate service cost and the projected benefit obligation. The FASB req
> Penny Pincher Company has a defined benefit pension plan for its employees. The following pension data are available at year‐end (in millions): Accumulated benefit obligation ………………………. $142 Projected benefit obligation ……………………………..205 Fair value of pla
> Postretirement benefits other than pensions (OPRBs) are similar to defined benefit pension plans in some respects and different in others. Required: a. Discuss the characteristics of OPRBs that make them different from defined benefit pension plans. b. D
> Carson Company sponsors a single‐employer defined benefit pension plan. The plan provides that pension benefits are determined by age, years of service, and compensation. Among the components that should be included in the net pension cost recognized for
> SFAS No. 87, “Employers’ Accounting for Pensions,” requires an understanding of certain terms. Required: a. Discuss the following components of annual pension cost: i. Service cost ii. Interest cost iii. Actual return on plan assets iv. Amortization of u
> Morgan Company (lessor) and Joplin Corporation (lessee) enter into a 10-year lease agreement for an office building for fixed annual lease payments of $50,000. Per the terms of the lease agreement, annual fixed lease payments comprise $40,000 for rent an
> FASB ASC 470 contains GAAP requirements for the initial recording of convertible debt. These debt instruments have either beneficial conversion features or conversion features that are not beneficial. Required: a. When does a convertible bond have a bene
> An objective of FASB ASC 840 is that lessors and lessees should account for leases similarly. Team Debate: Team 1: Argue that a lessee should be able to account for a lease as operating leases, whereas lessors may treat the same lease as a sales‐type lea
> Hill Corporation, a diversified manufacturing company, has offices and operating locations in major cities throughout the United States. The corporate headquarters for Hill Corporation is located in Chicago, Illinois, and employees connected with various
> On January 1, 2016, Dahlgren Corporation entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Dahlgren at the end of the lease term; consequently, the criteria establ
> On January 2, 2017, two identical companies, Daggar Corp. and Bayshore Company, lease similar assets with the following characteristics: 1. The economic life is eight years. 2. The term of the lease is five years. 3. Lease payment of $20,000 per year is
> Qtip Corp. owns stock in Maxey Corp. The investment represents a 10 percent interest, and Qtip is unable to exercise significant influence over Maxey. The Maxey stock was purchased by Qtip on January 1, 2016, for $23,000. The stock consistently pays an a
> Kallus Corp. is an industry leader in the manufacture of toys. Each year, its design staff comes up with new ideas that are a great success. As a result, Kallus’s sales and profits consistently exceed those of other toy manufacturers. Over the past 10 ye
> Watson Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2016. 1. Watson holds bonds issued by Fowler Corp. The bonds have an amortized cost of $600,00
> Presented following are four unrelated situations involving equity securities that have readily determinable fair values. Situation 1 A noncurrent portfolio with an aggregate market value in excess of cost includes one particular security whose market va
> The FASB issued SFAS No. 115 to describe the accounting treatment that should be afforded to equity securities that have readily determinable market values that are not accounted for under the equity method or consolidation. An important part of the stat
> The entity theory of equity implies that there should be no need for financial statements to distinguish between debt and equity. Alternatively, proprietary theory implies that such a distinction is necessary and yields information vital to owners and po
> Newsom Corporation is preparing the interim financial data which it will issue to its stockholders and the Securities and Exchange Commission (SEC) in its 10-Q quarterly report at the end of the first quarter of the 2014 fiscal year. Newsom’s accounting
> The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of year‐end (December 31, 2017), the product has not been manufactured for resal
> On July 1, 2017, Dynamic Company purchased for cash 40 percent of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year‐end. Cart, whose common stock is actively traded in the over‐the‐counter market, reported its t
> Victoria Company has both current and noncurrent equity securities portfolios. All of the equity securities have readily determinable fair values. Equity securities in the current portfolio are considered trading securities. At the beginning of the year,
> Explain the effect that changes in income tax rates have on income tax expense for companies that have deferred income tax assets and for companies that have deferred income tax liabilities.
> The amount of income taxes due to the government for a period of time is frequently different that the amount reported on the income statement for that period as income tax expense. Required: a. What are the objectives of accounting for income taxes
> The APB requires comprehensive interperiod income tax allocation under the deferred method. The FASB requires comprehensive interperiod income tax allocation under the asset–liability approach. For the following debate, you may take into consideration th
> The FASB requires comprehensive interperiod income tax allocation using the asset–liability approach. Some feel that there should be only partial interperiod income tax allocation. Others feel that there should be no interperiod income tax allocation. Te
> The FASB requires that deferred tax assets and liabilities not be discounted. Team Debate: Team 1: Present arguments in favor of discounting deferred tax liabilities. Team 2: Present arguments against discounting deferred tax liabilities.
> The Whitley Corporation’s year‐end is December 31. It is now October 1, 2017. The Whitley management team is taking a look at the prior nine months and attempting to make some short‐term strategy decisions. Whitley has experienced steady growth over the
> Mark or Make is a bourbon distillery. Sales have been steady for the past three years, and operating costs have remained unchanged. On January 1, 2017, Mark or Make took advantage of a special deal to prepay its rent for three years at a substantial savi
> Growth Corporation offered the following stock option plan to its employees: Each employee will receive 1,000 options to purchase shares of stock at an option price equal to the market price of the company’s common shares on the grant date, January 1, 20
> There are three general views regarding interperiod income tax allocation: no allocation, partial allocation, and comprehensive allocation. Required: a. Defend the position of no allocation of income taxes. b. Defend the position of partial allocation of
> SFAS No. 109, “Accounting for Income Taxes” (FASB ASC 740), requires companies to use the asset–liability method of interperiod income tax allocation. Required: a. Discuss the criteria for recognizing deferred tax assets and deferred tax liabilities unde
> SFAS No. 109, “Accounting for Income Taxes,” requires interperiod income tax allocation for temporary differences. Required: a. Define the term temporary difference. b. List the examples of temporary differences contained in SFAS No. 109. c. Defend inter
> Income tax allocation is an integral part of U.S. GAAP. The applications of intraperiod income tax allocation (within a period) and interperiod tax allocation (among periods) are both required. Required: a. Explain the need for intraperiod income tax all
> The FASB has carefully avoided the issue of discounting deferred taxes. SFAS No.109, “Accounting for Income Taxes,” stated, a deferred tax liability or asset should be recognized for the deferred tax consequences of temporary differences and operating lo
> In the discussion memorandum “Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both,” the FASB addressed the issue of whether redeemable preferred stock is debt or equity. SFAS No. 150 (see FA
> Should we separate the debt and equity features of convertible debt? Team Debate: Team 1: Pro separation: Present arguments in favor of separating the debt and equity features of convertible debt. Team 2: Against separation: Present arguments against the
> SFAS No. 159 (see FASB 825) allows companies to value financial liabilities at fair value. If not elected, financial liabilities will continue to be accounted for under the historical cost model. Team Debate: Team 1: Present arguments in favor of measuri
> On January 1, 2016, Plywood Homes, Inc., issued 20‐year, 4 percent bonds having a face value of $1 million. The interest on the bonds is payable semiannually on June 30 and December 31. The proceeds to the company were $975,000 (i.e., on the day they wer
> The following three independent sets of facts relate to (1) the possible accrual or (2) the possible disclosure by other means of a loss contingency. Situation 1 A company offers a one‐way warranty for the product that it manufactures. A history of warra
> A corporation may use stock splits and stock dividends to change the number of shares of its stock outstanding. Required: a. What is meant by a stock split effected in the form of a dividend? b. From an accounting viewpoint, explain how the stock split e
> The two basic requirements for the accrual of a loss contingency are supported by several basic concepts of accounting. Four of these concepts are periodicity (time periods), measurement, objectivity, and relevance. Required: Discuss how the two basic re
> On April 1, 2017, Janine Corporation sold some of its five‐year, $1,000 face value, 12 percent term bonds dated March 1, 2017, at an effective annual interest rate (yield) of 10 percent. Interest is payable semiannually, and the first interest payment da
> Business transactions often involve the exchange of property, goods, or services for notes on similar instruments that may stipulate no interest rate or an interest rate that varies from prevailing rates. Required: a. When a note is exchanged for propert
> Angela Company is a manufacturer of toys. During the year, the following situations arose: 1. A safety hazard related to one of its toy products was discovered. It is considered probable that liabilities have been incurred. Based on past experience, a re
> Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways: 1. Amortized over the life of old debt 2. Amortized over the life of the new debt issue 3. Recognized in the period of extinguishment
> The appropriate method of amortizing a premium or discount on issuance of bonds is the effective interest method. Required: a. What is the effective interest method of amortization, and how is it different from or similar to the straight‐line method of a
> Baker Company needs $1 million to expand its existing plant. Baker management is considering the following two alternative forms of financing: 1. At the beginning of 2017, issue $1 million of convertible, 10‐year, 10 percent bonds. Each $1,000 bond can b
> Whiley Company issued a $100,000, five‐year, 10 percent note to Security Company on January 2, 2016. Interest was to be paid annually each December 31. The stated rate of interest reflected the market rate of interest on similar notes. Whiley made the fi
> The following Statement of Cash Flows was prepared for the Baines Corporation. Baines Corporation Statement of Sources and Uses of Cash Year Ended December 31, 2017 Sources of cash Net income $111,000 Depreciation and depletion 70,000
> A company is required to report a liability in its balance sheet when it expects to lose a law suit and the amount of the expected loss can be reasonably estimated. Conversely, a company is prohibited from reporting a receivable in its balance sheet whe
> The directors of Lenox Corporation are considering issuing a stock dividend. Required: a. What is a stock dividend? How is a stock dividend distinguished from a stock split from a legal standpoint? From an accounting standpoint? b. For what reasons does
> In Phase B of the joint FASB-IASB financial statement presentation project, the Boards are planning to release a plan to recast financial statements into a new format. The proposed new format of the statement of financial position would no longer divide
> IAS No. 8 states that when a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and consideri
> In Phase B of the joint FASB-IASB financial statement presentation project, the Boards are planning to release a plan to recast financial statements into a new format. One possible result is the elimination of the current definition of net income. In its
> You are in charge of reviewing the classification of unusual items that have occurred during for your CPA firm during the current year. The following material items have come to your attention: 1. A department store incorrectly overstated its ending inve
> Discuss how a company’s primary financial statements are useful to potential investors who are trying to decide whether to buy stock in the company. Support your discussion by citing objectives outlined in the Conceptual Framework.
> The IASB outlined its requirements for the presentation of the income statement in IAS No. 1, “Framework for the Preparation and Presentation of Financial Statements” Required: a. What is the objective of IAS No. 1? b. What income information does IAS
> In 2007, the SEC modified its position on the Form 20-F requirement when it issued; “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to GAAP.”
> Discuss the similarities and differences between the FASB and IASB conceptual frameworks with respect to the definitions of the elements of financial statements.
> The IASB framework for preparing and presenting financial statements defines assets as resources controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. This definition is similar
