Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 12, Problem 8C
To determine
Discuss the issues that are raised by the given situation, from the perspective of financial and ethical reporting.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
You are auditing the financial records of a company, and you are aware that it has grown quickly in the last few years by acquiring other companies. You look up the disclosure in last year’s annual report which states, “The company amortizes its intangibles over periods ranging from 3 to 15 years.” As you review the company’s records, you find that the company made an acquisition of a “high-tech” company 3 years ago and has not recognized any impairment on the related goodwill. In the last 6 years, the company has made five other acquisitions and has not recognized any impairment related to them. Included in the acquisitions are several patents that are amortized over 9 years and some intangibles with indefinite lives.
Required:
From financial reporting and ethical perspectives, discuss the issues raised by this situation.
You are auditing the financial records of a company and are reviewing the depreciation computations. Included in the assets are two buildings and numerous machines in each building. One of the buildings is used to manufacture components of toys and the other for assembly and packing, using the manufactured components as well as others purchased from suppliers. You see that the company uses straight-line depreciation over 40 years for the buildings and 20 years for the machinery. You decide to ask the CFO about these calculations, and he replies, “We use 40 years for the buildings because it is close to the 39 we use for tax. And our best guess is that we will replace the machines twice while we use the building. And the method is easy to use and most companies use it, don’t they? Or have things changed that much since I was in college?” You feel as if you have annoyed the CFO with your questions, so you decide to leave. As you walk back to your office, you recall from earlier in the…
You are auditing the financial records of a company and are reviewing the depreciation computations. Included in the assets are two buildings and numerous machines in each building. One of the buildings is used to manufacture components of toys and the other for assembly and packing, using the manufactured components as well as others purchased from suppliers. You see that the company uses straight-line depreciation over 40 years for the buildings and 20 years for the machinery. You decide to ask the CFO about these calculations, and he replies, “We use 40 years for the buildings because it is close to the 39 we use for tax. And our best guess is that we will replace the machines twice while we use the building. And the method is easy to use and most companies use it, don’t they? Or have things changed that much since I was in college?” You feel as if you have annoyed the CFO with your questions, so you decide to leave. As you walk back to your office, you recall from earlier in the…
Chapter 12 Solutions
Intermediate Accounting: Reporting And Analysis
Ch. 12 - Prob. 1GICh. 12 - Prob. 2GICh. 12 - Prob. 3GICh. 12 - Prob. 4GICh. 12 - Prob. 5GICh. 12 - Prob. 6GICh. 12 - Prob. 7GICh. 12 - What activities are included in RD? Which are...Ch. 12 - What elements of RD activities does a company...Ch. 12 - How does a company record a patent worth 100,000...
Ch. 12 - Prob. 11GICh. 12 - Prob. 12GICh. 12 - Over how many years are patents amortized?...Ch. 12 - Prob. 14GICh. 12 - Prob. 15GICh. 12 - Prob. 16GICh. 12 - Prob. 17GICh. 12 - Prob. 18GICh. 12 - Prob. 19GICh. 12 - Prob. 20GICh. 12 - What is the proper time or time period over which...Ch. 12 - Prob. 2MCCh. 12 - Prob. 3MCCh. 12 - Which of the following assets typically are...Ch. 12 - Prob. 5MCCh. 12 - Prob. 6MCCh. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - Steel Magnolia Incorporated purchased a trademark...Ch. 12 - Match the following items with correct accounting...Ch. 12 - Notting Hill Company incurred the following costs...Ch. 12 - Hook Corp. incurred the following start-up costs,...Ch. 12 - Mystic Pizza Company purchased a patent from Prime...Ch. 12 - Mystic Pizza Company purchases a franchise from NY...Ch. 12 - Prob. 7RECh. 12 - Prob. 8RECh. 12 - Prob. 9RECh. 12 - Prob. 10RECh. 12 - Prob. 1ECh. 12 - On January 4, 2019, Franc Company purchased for...Ch. 12 - On January 11, 2019, Hughes Company applied for a...Ch. 12 - Gansac Publishing Company signed a contract with...Ch. 12 - Prob. 5ECh. 12 - Prob. 6ECh. 12 - KLK Clothing Company manufactures professional...Ch. 12 - Cressman Company incurred RD costs for various...Ch. 12 - In 2019, Lalli Corporation incurred RD costs as...Ch. 12 - Kling Company was organized in late 2019 and began...Ch. 12 - Prob. 11ECh. 12 - Prob. 12ECh. 12 - Prob. 13ECh. 12 - Prob. 14ECh. 12 - Prob. 15ECh. 12 - Prob. 16ECh. 12 - Company is considering purchasing EKC Company....Ch. 12 - Prob. 18ECh. 12 - Prob. 19ECh. 12 - Prob. 20ECh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Halpern Companys controller prepared the following...Ch. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Hamilton Companys balance sheet on January 1,...Ch. 12 - Prob. 8PCh. 12 - Lee Manufacturing Corporation was incorporated on...Ch. 12 - Information concerning Tully Corporations...Ch. 12 - Prob. 11PCh. 12 - In examining Samson Manufacturing Companys books,...Ch. 12 - Prob. 2CCh. 12 - Prob. 3CCh. 12 - Prob. 4CCh. 12 - On June 30, 2019, your client, Sprauge...Ch. 12 - Prob. 6CCh. 12 - NBC paid 401 million for the rights to televise...Ch. 12 - Prob. 8C
Knowledge Booster
Similar questions
- Birmingham Company has been in business for five years. Last year, it experienced rapid growth and hired a new accountant to oversee the physical assets and record acquisitions and depreciation. This year, the controller discovered that the accounting records were not in order when the new accountant took over, and a $3,000 depreciation entry was omitted resulting in depreciation expense being understated last year. How does the company make this type of correction and where is it reported?arrow_forwardThe only long-term liability of Range Corporation is a note payable for $1 million secured by a mortgage on the company’s plant and equipment. You have audited the company annually for the three preceding years, during which time the principal amount of the note has remained unchanged. The maturity date is 10 years from the current balance sheet date. You are informed by the president of the company that all interest payments have been made promptly in accordance with the terms of the note. Under these circumstances, what audit work, if any, is necessary with respect to this long-term liability during your present year-end audit?arrow_forwardYou are engaged to examine the financial statements of Spillane Company for the year ended December 31. Assume that on November 1, Spillane borrowed $500,000 from Second National Bank to finance plant expansion.The long-term note agreement provided for the annual payment of principal and interest over five years. The existing plant was pledged as security for the loan. Due to the unexpected difficulties in acquiring the building site, the plant expansion did not begin on time. To use the borrowed funds, management decided to invest in stocks and bonds and on November 16, invested the $500,000 in publicly traded securities. Required:Develop specific assertions (audit objectives) related to securities (assets) based on management’s five (PCAOB) general assertions.arrow_forward
- . Discuss the appropriate treatment in the financial statements of each of the following. a. Gain on sale of investment securities. b. A profit-sharing bonus to employees computed as a percentage of net income. c. Additional depreciation on factory machinery because of an error in computing depreciation for the previous year. d. Rent received from subletting a portion of the office space. e. A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $725,000. f. A reduction in the Allowance for Doubtful Accounts balance because the account appears to be considerably in excess of the probable loss from uncollectible receivables.arrow_forwardWilliams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2009 by two talented engineers with little business training. In 2021, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries were prepared. The income tax rate is 25% for all years. A five-year casualty insurance policy was purchased at the beginning of 2019 for $36,500. The full amount was debited to insurance expense at the time. Effective January 1, 2021, the company changed the salvage value used in calculating depreciation for its office building. The building cost $612,000 on December 29, 2010, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000. On December 31, 2020,…arrow_forwardRed Business took out a mortgage loan of $400m on August 1, 2020 to construct an apartment complex and used the Head Office building and land as the security for the loan. Each month subsequent to the issue of the mortgage, a payment of $400,000 was paid to the mortgagor. You are in charge of the current year audit for Red Business, which has a balance sheet date of December 31, 2020. Explain the importance of preparing an audit schedule for the permanent file in order to audit the above mortgage and state the type of information should be included the schedule. In conducting the audit list and explain the four accounts that should be included in the audit. Prepare a memo to the management of Red Business explaining the substantive procedure and the appropriate audit evidence required in order to verify the issue of the mortgage, the balance in the mortgage and interest payable accounts at December 31, 2020, and the balance in interest expenses for the year 2020.arrow_forward
- The first audit of the books of Ayayai Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $468k (salvage value of $46,800) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $50k. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $80k in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $80k to a loss account in 2021. 4. Ayayai Company purchased the copyright from another company early in 2019 for $51k. Ayayai had not…arrow_forwardThe first audit of the books of Headland Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $555,000 (salvage value of $55,500) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $49,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $87,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $87,000 to a loss account in 2021. 4. Headland Company purchased a copyright from another company early in…arrow_forwardTrancor Ltd has been in operation for over 60 years. It has a standard straight-line depreciation policy for all its fixed assets. A new CFO was appointed in January 2020 and after review of the financial statements questioned the large write off of assets in December 2019. The Accountant stated these assets were computers and were not being used as the technology was obsolete. New computers were purchased on March 1, 2019 to replace the old ones and these were being depreciated over 5 years using the current policy. The CFO after discussion with management agreed that the reducing balance method at a rate of 30% per annum is more suitable for the computers and instructed the Accountant to make the changes to the depreciation policy. This change meets the requirements of a change in accounting policy. The scrap value of the computers is $5,000. The Balance Sheet extract for December 31, 2019 was as follows: Computers at cost 80,000 Accumulated depreciation…arrow_forward
- You are auditing a manufacturing company ABC Co. with a profit before tax $2400,000, andthe following information comes to light about your client:1- ABC Co has significant plant and machinery which it uses to make its products.During the year the efficiency of the company’s machinery was improvedsignificantly. This was because a comprehensive review of each piece of machinerywas undertaken and an assessment was made as to whether a minor repair,extensive refurbishment or a complete replacement was needed. ABC then took theappropriate action in each case and spent a total of $600,000 in doing so.2- Following some ratios that obtained from the client, compared with the industryratios2018 2019 Industry averageGross profit[% of totalsales]Dr ARCr Sales%42 %65 40%Credit Sales[% of totalsales]40% 75% 35%Receivables Turn over 4.56 2.41 5.1Inventory % of Totalassets24.7% 28.2% 23.4%Inventory Turn over 2.15 1.75 2.21Current Ratio 2.31 1.15 2.35Requirement:A- Considering the audit risk in…arrow_forwardThe first audit of the books of Windsor Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $528,000 (salvage value of $52,800) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $49,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $81,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $81,000 to a loss account in 2021. 4. Windsor Company purchased a copyright from another company early in…arrow_forwardThe first audit of the books of Sweet Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $534,000 (salvage value of $53,400) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $42,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $90,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $90,000 to a loss account in 2021. 4. Sweet Company purchased a copyright from another company early in 2019…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning