Weirich7e Cases

8/10/2019 Weirich7e Cases

1/18

STUDENT CASES

to accompany

Accounting & Auditing Research: Tools & Strategies, 7e

NOTE: In addition to the in-chapter and end-of-chapter exercises which serve as short casesyou will find the following short cases arranged by course title that can also be utilized asshort cases that reuire the student to access the authoritative literature to address the issuepresented in the case! "olutions to the cases below are available to instructors on the #eirichAccounting & Auditing Research 7e instructor website at www!wiley!com$college$weirich !Other excellent sources of longer and more detailed cases include the %eloitte Truebloodcases &www!deloitte!com$more$%T'$cases(sub)!htm*+ as well as the ,I., cases&www!aicpa!org*!
http://www.wiley.com/college/weirichhttp://www.deloitte.com/http://www.wiley.com/college/weirichhttp://www.deloitte.com/


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Topical Index o Student Cases

INTER!EDIATE ACC"UNTIN#

ase /: 0eporting acuisition and repayment transactions in the "tatement of ash 'lows

ase 1: 0ecording a forfeited payment

ase 2: 0evenue and expense recognition associated extended warranties

ase 3: ,ccounting for 4due on demand5 note payable

ase 6: .urchase of a controlling interest with a greenmail premium

ase 7: 0evenue recognition in the construction industry

ase 8: ,ccrual and measurement of interest payments

ase 9: 0ecognition of an asset transfer when title has not yet been received

ase : apitalization of interest and property taxes on a construction pro)ect

ase /;: %eferred compensation and life insurance policy recognition

ase //: 0eporting earnings per share balances for subsidiary companies

ase /1: %eferment of lease payments

ase /2: %isclosure of prior period ad)ustments in the statement of cash flows

ase /3:


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AD$ANCED ACC"UNTIN#

ase /: 0eporting of letters of guarantee notes payable

ase 1: 'actors affecting minority interest control

ase 2: .rofits and losses in the investment in foreign currencies

ase 3: ,mortization of foreign currency transaction gains and losses

ase 6: 0eflection of expensed computer programs on consolidated financial statements

ase 7: lassification of a proposed financial instrument as a hedge

ase 8: %isclosure of proceeds and payments from cash flow hedging activities

ase 9: .roper valuation of a 4guaranteed5 business combination

#"$ERN!ENT AND N"T%"R%'R"IT ACC"UNTIN#

ase /: 0ecognition restricted or non-restricted assets that are promised but not received

ase 1: ,ffect of 4permanent5 reductions in the value of 4promised5 assets

ase 2: %isclosure and classification on a company?s "tatement of cash 'lows

ase 3: %isclosure of potential interest rate swings and commercial paper by a city

ase 6: apital and operating leases between related parties

ase 7: Elimination of profits on intercompany sales

ase 8: 0eporting of funds and potential obligations on bonds issued for third parties

ase 9: %isclosure of payments made to agents or bro=ers

ase : ,ccrual of vacation time of unestablished employees


4/18

AUDITIN#

ase /: ommunication with predecessor auditors

ase 1: "cope limitations

ase 2: Outside services for inventory counts

ase 3: "upplementary disclosures

ase 6: 0estating prior years? financial statements

ase 7: Independence in a review or compilation engagement

ase 8: @ualified report and account classification

ase 9: 0e-issuance of financial statements

ase : ommunication with audit committees

ase /;: ,ccounting for assets held for sale

TA(

ase /: #hen should gross income be accruedA

ase 1: "toc= purchased by an employee

ase 2: Income sourcing- international

ase 3: Business deductions

ase 6: %eduction for foreign travel

ase 7: ontingent liabilities


5/18

INTER!EDIATE ACC"UNTIN#

Case ):


6/18

Case .: Bo Bro=er ompany charges a fee for bringing together the ,cme onstructionompany and the 'irst Ban= ompany! The parties agree that Bo earns her fee when,cme and 'irst 4agree5 to the terms of the construction mortgage! Cowever+ Bo can

receive four types of documents to 4settle5 this matter: &a* a non-interest bearing+unsecured 4negotiable5 note in payment of the fees earned+ which is payable over thetime period of the related construction mortgageJ &b* a non-negotiable note payable overthe same time period as in case &a*J &c* a commitment letter+ not contingent upon the4future event5 of the borrower receiving certain construction drawsJ or &d* a commitmentletter+ where the fees would be paid only if the borrower actually receives the draws forthe construction from the lender! Bo as=s the accountant when to recognize revenuesunder each of these four scenarios!

Case 7:Games Olds buys a four-year+ D/+;;;+;;; certificate of deposit from the "econdNational Ban=! Games will receive 6 interest in year /J 6!6 in year 1J 7 in yearthreeJ and 7!6 interest in year 3! If Games 4redeems5 this certificate before the maturitydate+ he would receive a cumulative 3!6 annual rate of interest of 3!6! The Ban= hasascertained that less than one percent of its depositors redeem their certificates before thematurity date! The ban= as=s its accountant how to accrue and measure such interestpayment obligations!

Case /: On Ganuary /+ year /+


7/18

Case )):The Bootsie Colding ompany has sales exceeding D/; billion and each of itsthree+ wholly-owned subsidiaries has sales exceeding D1 billion! Three years ago+ thesubsidiaries had 4complex5 capital structuresFuntil Bootsie acuired them! Bootsie?s

annual report shows its consolidated income and individual income statement accounts ofeach subsidiary company! "hould Bootsie also report separate earnings-per-sharebalances for the three subsidiary companiesA

Case )*:eila ompany began an operating lease arrangement with %ebco Industries+which was slated to begin on Ganuary /+ at monthly lease payments of D/;+;;;!Cowever+ %ebco?s negligence prevented eila from moving in on timeFsince it failed toclean up the place adeuately enough to earn a ertificate of Occupancy from thetownship! Thus+ on Ganuary /+ eila spent D6+;;; for leasehold improvements+ whichenabled her to obtain the needed ertificate of Occupancy on ,pril /! In any event+ eilapaid %ebco all the reuired D2;+;;; lease payments and has decided not to pursue legalaction for the 4un-ready5 building! Cowever+ can eila defer the D2;+;;; Ganuary-


8/18

Case )7:,lbright Inc! has recently issued a /; stoc= dividend to its existingstoc=holders! ,s a result of the issuance of the stoc= dividend the mar=et price of thestoc= declined 16! ,lbright has reuested your assistance as to treating this stoc=dividend as a stoc= split! #ould this be acceptable under >,,.A

Case )/:Corizons Inc! has agreed to sell an investment in a subsidiary that has beenaccounted for on the euity method of accounting to a minority stoc=holder in exchangefor the stoc=holder?s share in Corizons! "ince the fair value of the investment exceeds itsboo= value+ Corizons EO is considering recognizing a gain on the exchange! Cowever+the new 'O at Corizons is recommending to the board of directors that the excess fromthe exchange be accounted as a credit to euity! Corizons turns to you for adviceL


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11/18

#"$ERN!ENT AND N"T%"R%'R"IT ACC"UNTIN# Cases

CASE ):

On Ganuary /+ the Cawaii ancer Institute has received a promise from the Obama'oundation to receive a building that the 'oundation recently appraised at D1;;+;;;!Cowever+ the building cost only D/16+;;;! The ancer Institute promised to =eep thebuilding 4permanently restricted+5 i!e!+ never to sell it and to use it only for its wor= inhelping cancer patients! ,s of the end of the ancer Institute?s fiscal year &%ecember 2/*+no title to the building was received by the Institute! Cow should the Institute record thistransactionA

CASE *:

On Ganuary /+ the Cawaii ancer Institute has received a promise from the Obama'oundation to receive a building that the 'oundation recently appraised at D1;;+;;;Fbutcost it only D/16+;;;! The Institute promised to =eep the building 4permanentlyrestricted+5 i!e!+ never to sell it and to use it only for its wor= in helping cancer patients!

,fter not receiving title by %ecember 2;+ the Institute inuired as to the status of thepromised building! The 'oundation stated that water damage to the building &from lastyear?s flood* has permanently reduced the carrying value of the building to D/;;+;;;!The 'oundation had initially hoped to set up a fund drive to help 4clean up5 the building!Cowever+ both parties have agreed that as of %ecember 2/+ this fund drive would notmaterialize and the date to receive the building would remain un=nown! Cow should the

Institute now record the promised giftA

CASE +:

On Ganuary /+ the Old Town Ceart ,ssociation received a D/+;;;+;;; endowment fromthe hamber family! Mnder terms of the gift+ the ,ssociation must permanently restrictthe endowmentFbut may spend up to half of the interest earned on the gift or half of allprofits earned from selling such investments for operating purposes! The ,ssociationimmediately invested the gift proceeds in some 4blue chip5 stoc=s! ,fterwards+ the,ssociation spent half of the D6;+;;; dividends earned from the hamber portfolio for

operating purposes! #here in the "tatement of ash 'lows &i!e!+ operating+ investing+ orfinancing activities* should the ,ssociation report these transactionsA


12/18

CASE :

On ,pril /6+ the ity of Old .utz invests its 4available5 excess cash with an investmentbro=er! The investment bro=er then purchases ;-day commercial paper from a set of

4blue chip5 companies! On Gune 2;+ the last day of the ity?s fiscal year+ the ity plannedto 4roll over5 the commercial paper when they mature! Cowever+ interest rates felldramatically in late Gune resulting in a lower value for the 4maturing5 commercial paper!


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15/18

Cugo purchased some MN securities+ which made him lose his independenceFa factnoted in his ., compilation report! Now+ the MN ompany management wantsCugo to issue comparative two year financial statements &last year and this year*! anCugo re-issue his review report now that he is no longer independent of the MNompanyA

Case 7: Goseph Gosephs+ ., is auditing the Elder ompany?s current year?s annualfinancial statements and notices that the ompany has violated the 1!/ to /!; current ratioreuirements as part of its debt agreement with the "unshine Ban=! The company?scurrent ratio is /!96 to /! Elder?s management believes &strongly* that it will improvetheir current ratio during the ;-day grace period! Nonetheless+ the ban= has the 4right5to call in the entire D1 million loan! Cowever+ Goseph is not so sure and must issue hisreport before this grace period expires! "hould Goseph ualify his opinion or demand thatElder re-classify this loan as a short-term liability+ in light of the above circumstancesA

Case /: %uring Goseph Gosephs?+ .,+ audit of the Belton ompany?s prior year?sfinancial statements+ he notices that sales and profits have fallen dramatically from theirprevious year highs! Cis subseuent &Ganuary 1;+ current year* discussion with Gohnand and Gill Cer &eual 6; shareholders of the ompany* indicate that Gohn recognizesthat he spent much less time in the previous year with the business than he did in prioryears! Ce agreed to refund D/;;+;;; of his D/ million previous year?s compensationimmediately+ and Gohn and Gill agreed that he would receive his original D/ millioncompensation in future years &as long as he re-dedicated his efforts on behalf of thecompany*! Goseph then reduced the Belton ompany?s previous year?s salary expense forthe D/;;+;;; refund+ since the parties attributed these transactions to previous year?sevents! Ce then issued the audited financial statements on


16/18

TA( 2 Cases

Instructions: In writing a tax memo begin the discussion of the law with at least oneparagraph on the relevant ode language! .inpoint the location of the relevant languagein the ode as precisely as possible! Then add a paragraph&s* on any relevant Treasury

0egulation! Then describe any relevant cases or 0evenue 0ulings! #rite clearly andconcisely so that the tax memo is normally limited to three pages!

#rite a memo identifying the legal I""ME&s*+ conclusion+ list of relevant authorities+discussion of the law+ and the application of the law! Mse these subheadings+ as it is notenough to describe the law! 'or each ,"E discuss and apply at least one relevant,"E or revenue ruling! The most important aspects of the memo are the I""MEstatement&s* and the application of the law to the problem facts! The application shouldintegrate reference to every source of law previously discussed! %o not )ust answer theuestion as=ed in the problem!

CASE )3 4hen #ross Inco5e is Accrued 6asic8

Taxpayer is a securities firm which uses the accrual method of accounting!Taxpayer executes stoc= trades and performs settlement functions! "ettlementfunctions include recording the sale and confirming it with the customer! Tradesmade on %ecember 19+ 1;6+ until the end of the month are not settled untilGanuary of 1;7! Taxpayer made D/+;;;+;;; of net commissions from thesetrades in late %ecember! "ince the security is not credited to the customer?saccount until settlement date+ taxpayer wants to declare the income on thesettlement dates in 1;7! Taxpayer does not receive the money until Ganuary1;7! ,dvise the taxpayer!

ISSUE:

#hether an accrual basis securities firm has gross income under sec! 36/&a* onthe trading date or the next year on the settlement date when all the wor= isperformed+ payment is due+ and money receivedA

CASE *3 usiness Deductions9 6asic8

'or the past two years+


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18/18

CASE -3 Inco5e Sourcing 2 International Tax 6Ad=anced8

Cidetoshi was a world-renowned roc= star from Newountry! "ony-M", 0ecordscontracted with Cidetoshi to produce records! "ony-M", 0ecords retained all

intellectual property rights in the recordings! The contract granted Cidetoshipayments or 4royalties5 based upon future sales of recordings! Cidetoshi paidtaxes on the payments in Newountry as royalties! The M!"!-Newountry treatyexempts royalties from tax in the M!"! Cowever+ Newountry tax treaty+ did notdefine royalties or compensation for personal services! The I0" has toldCidetoshi+ his contract with "ony-M", generates personal service income in theMnited "tates! ,dvise Cidetoshi!

CASE .3 Contingent lia;ilities in a Section +-) transer 6Ad=anced8

co is an accrual basis taxpayer with multiple lines of businesses! One businessis a gas station! The land underneath the gas station did not appear contaminatedwhen co purchased it! Cowever+ the land now has potential soil andgroundwater problems &environmental liabilities*! co engaged in a section 26/tax free exchange transferring the gas station to a new subsidiary "co in exchangefor the stoc= of "co and the assumption of the environmental liabilities! Beforethe transfer+ co did not ta=e any environmental remediation efforts to clean upthe land?s soil and groundwater problems! Cow is the basis of co?s landdeterminedA

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Weirich7e Cases