Horngren's Financial & Managerial Accounting, Student Value Edition (5th Edition)
5th Edition
ISBN: 9780133851267
Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura
Publisher: PEARSON
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Question
Chapter 10, Problem 10.1CTEI
1.
To determine
Ethical Issue
Case Summary: Because of the recent mortgage crisis, number of banks reported loss in their mortgage receivable accounts, and other assets on the basis of fall in the fair value of the assets.
To Identify: The effect to the stakeholders if such losses were not reported in a timely way
2.
To determine
To Ascertain: If there is any ethical issue involved when the business chooses not to report the losses.
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Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell- Soft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.
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The fallout from the financial crisis of 2008 included an overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, which led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers.
Instructions
Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two examples.
Chapter 10 Solutions
Horngren's Financial & Managerial Accounting, Student Value Edition (5th Edition)
Ch. 10 - Prob. 1QCCh. 10 - Which of the following investments is most likely...Ch. 10 - If Intervale Railway invests 100,000 in 5% bonds...Ch. 10 - Prob. 4QCCh. 10 - Prob. 5QCCh. 10 - Prob. 6QCCh. 10 - Prob. 7QCCh. 10 - Harvard Co. purchased a trading investment on...Ch. 10 - Prob. 9QCCh. 10 - Prob. 10QC
Ch. 10 - What is a debt security?Ch. 10 - Prob. 2RQCh. 10 - Prob. 3RQCh. 10 - Briefly describe the five specific types of debt...Ch. 10 - How is the purchase of a held-to-maturity debt...Ch. 10 - Prob. 6RQCh. 10 - What method is used for investments in equity...Ch. 10 - What method is used for investments in equity...Ch. 10 - What adjustment must be made at the end of the...Ch. 10 - Where on the financial statements is an unrealized...Ch. 10 - Prob. 11RQCh. 10 - Prob. 12RQCh. 10 - Prob. 13RQCh. 10 - What does the rate of return on total assets...Ch. 10 - Identifying why companies invest and classifying...Ch. 10 - Prob. 10.2SECh. 10 - Prob. 10.3SECh. 10 - Accounting for equity method On January 1, 2016,...Ch. 10 - Accounting for trading investments On February 1,...Ch. 10 - Prob. 10.6SECh. 10 - Computing rate of return on total assets Kabra's...Ch. 10 - Prob. 10.8ECh. 10 - Prob. 10.9ECh. 10 - Accounting for bond investments Otter Creek Co....Ch. 10 - Accounting for stock investments Dollar Bill...Ch. 10 - Prob. 10.12ECh. 10 - Prob. 10.13ECh. 10 - Accounting for stock investments Suppose that on...Ch. 10 - Prob. 10.15ECh. 10 - Prob. 10.16ECh. 10 - A Accounting for bond investments Suppose Jenner...Ch. 10 - Prob. 10.18APCh. 10 - Accounting for stock investments The beginning...Ch. 10 - Accounting for bond investments Suppose Ritter...Ch. 10 - Classifying and accounting for stock investments...Ch. 10 - Accounting for stock investments The beginning...Ch. 10 - Prob. 10.23CPCh. 10 - Prob. 10.1CTEICh. 10 - Wild Adventure conducts tours of wildlife reserves...Ch. 10 - Prob. 10.1CTFSCCh. 10 - Prob. 10.1CTTPCh. 10 - In 150 words or fewer, explain the difference...
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Similar questions
- During the 2008 recession, large financial institutions including investment and insurance companies, were at risk of bankruptcy due to the sub-prime mortgage crisis. Which element of insurance risk best demonstrates this concept? A. the loss produced by the risk must be definite B. the loss produced by the risk must be measurable C. the loss must not be catastrophic D. the loss must be fortuitous or accidentalarrow_forwardOne example of moral hazard in finance industry is "insurance policies often decreases incentive to take care of possession of its customers". How should people mitigate this problem?arrow_forwardWhich of the following would be an example of conservative accounting? a. Recording an increase in fair value of certain assets as a gain in net income but not recording a decrease in fair value as a loss.b. Estimating the percentage of bad debts as 6% of accounts receivable instead of 10% of accounts receivable.c. Estimating warranty costs to be 4% of sales instead of 9% of sales.d. Assessing the probability of a contingent liability as probable instead of reasonably likely.arrow_forward
- Loan covenants are used for which of the following reasons?a. To protect the lender from the borrower’s substantially weakening of the latter’s financial position.b. To protect the borrower from the lender’s calling the loan early.c. To protect the auditors from false information by the borrower.d. To protect shareholders from management taking on too much debt.arrow_forwardWhen creditors who relied on an entity’s audited financial statements suffer monetary lossesafter a customer (the auditors’ client) goes bankrupt, what must the plaintiff creditors in alawsuit for damages show in a court that follows the doctrine in Credit Alliance?a. The auditors knew and specifically acknowledged identification of the creditors.b. The auditors could reasonably foresee them as beneficiaries of the audit because entitiessuch as this client use financial statements to obtain credit from vendors.c. The plaintiffs were foreseen users of the audited financial statements because they werevendors of long standing.d. All of the abovearrow_forwardMany critics argue that greed in the mortgage markets caused the credit crisis. Yet many market advocates suggest that greed is good, as the thirst for profits by firms that participate in the mortgage markets allows for economic growth. Explain how regulations can allow for greed while also ensuring proper transparency in the mortgage markets so that another credit crisis does not occur.arrow_forward
- Individuals who believe they relied on misstated financial statements to make a decision andhave suffered losses as a result will issue an action known as aa. Breach of contract.b. Tort.c. Securities litigation.d. Constructive fraud.arrow_forwardBusiness damages, as a result of financial fraud, directly impact the operations of any company. Under this premise: What can be, in your opinion, some of the commercial damages resulting from financial fraud? What methods can you use to assess the damages caused by financial fraud? How do generally accepted accounting principles help prevent financial statement fraud?arrow_forwardIn prior periods, Cyber Systems used the direct write off method to account for bad debts. Cyber Systems historically had a stable client base and management did not continue to service clients who did not pay invoices due. Complete the following: (a) Describe the direct write off method of accounting for bad debts. (b) Explain with reference to one qualitative characteristic why the direct write off method was deemed appropriate prior to the COVID-19 pandemic and why it is unlikely to be appropriate since the pandemic.arrow_forward
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