Rump Organization

1176 Words Apr 22nd, 2013 5 Pages
MEMORANDUM

To: Dr. John J. Morris, Department of Accounting
From: Group #2 (Jordan King, Kelsey Darnell, Xiaomeng Liao)
Date: 04/04/2013
Subject: ACCTG 642: Case 08-6, The Rump Organization

Statement of Relevant Facts
The Rump Organization is a commercial real estate company that purchases and constructs commercial property. On the basis of the corporate restructuring plan, Rump’s CEO, Ronald Rump, and Rump’s board of directors on December 27, 2005 approve a plan to involuntarily terminate 100 of the company’s employees. The plan provides for each terminated employee to receive a lump-sum cash payment equal to one month’s salary only if the employee voluntarily signs a waiver of any right to legal action against Rump.
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A possible solution is that a liability is not recognized at all. A second alternative solution is that the liability would be initially recognized at communication date, December 31, 2005, then adjusted cumulatively over the future service period, December 31, 2005 through the termination date of January 31, 2006. A third alternative solution is that the liability is recognized on the communication date of December 31, 2005. We assume that management would prefer no recognition of a liability; however, if a liability must be recognized management would prefer the liability to be recognized on December 31, 2005, then adjusted as terminated employees sign or do not sign the waivers over the service period. Management would not want to recognize part of the liability in January because this would negatively affect their balance sheet and their current ratio during the first quarter, which could, in turn, affect the company’s ability to satisfy contracts or receive loans. In contrast, recognizing the liability at the end of the year would have little to no material impact on the company’s ratios or financials since it would be taking into account the entire year versus a few months. The auditors’ main concern will be to make certain that the liability is recognized and reported in the proper fiscal year as this liability could be quite large and materially affect financial statements.

Conclusions and
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