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 warranty claims has been compiled, and the probable amount of claims related to sales for a given period can be determined. Situation 2 Following the date of a set of financial statements, but before the issuance of the financial statements, a company enters into a contract that will probably result in a significant loss to the company. The amount of the loss can be reasonably estimated. Situation 3 A company has adopted a policy of recording self‐insurance for any possible losses resulting from injury to others by the company’s vehicles. The premium for an insurance policy for the same risk from an independent insurance company would have an annual cost of $2,000. During the period covered by the financial statements, no accidents involving the company’s vehicles resulted in injury to others. Required: Discuss the accrual of a loss contingency and/or type of disclosure necessary (if any) and the reason(s) such a disclosure is appropriate for each of the three independent sets of facts given. Complete your response to each situation before proceeding to the next situation.
> 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
> 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. Yo
> 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
> 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
> In September 2015, the FASB proposed changing the definition of materiality in Chapter 3 of SFAC No. 8. Required: a. How did SFAC No. 2 define materiality? b. What is the FASB’s proposed new definition of materiality? c. This proposal was met with disapp
> The total owners’ equity is usually under a number of sub captions on the corporation’s balance sheet. Required: a. List the major subdivisions of the stockholders’ equity section of a corporate balance sheet, and describe briefly the nature of the amoun
> The International Accounting Standards Committee (IASC) was formed in 1973. In 2001 the IASC was replaced by the International Accounting Standards Board (IASB). Required: a. What was the purpose of the IASB? b. How does the IASC attempt to achieve these
> Chapter 3 of SFAC No. 8 identifies the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes. Required: List and briefly describe these
> Five approaches to transnational financial reporting were identified in the chapter. Required: a. List some of the advantages and disadvantages of each approach.
> Discuss the structure of the FASB’s conceptual framework for financial accounting and reporting
> The advantages and disadvantages of harmonizing accounting standards were summarized in this chapter. Required: Expand on these advantages and disadvantages. [Hint: You might wish to consult John N. Turner, “International Harmonization: A Professional Go
> Team Debate: Team 1: Argue that a universally accepted theory of accounting is needed. Team 2: Argue that a universally accepted theory of accounting is not needed.
> Roper Corporation purchased 100 storage boxes for the office. The boxes cost $15 each and should last at least ten years. Each team’s arguments should be grounded on the Conceptual Framework, emphasizing the Objectives of Financial Reporting and the qual
> The authority to issue accounting pronouncements has evolved overtime. Required: a. Discuss the rule making bodies involved in issuing accounting pronouncements since the 1930s. b. SEC Accounting Series Release (ASR No. 4) allowed accounting principles
> The FASB has been working on a conceptual framework for financial accounting and reporting and has issued eight Statements of Financial Accounting Concepts. These SFACs are intended to set forth objectives and fundamentals that will be the basis for deve
> The FASB is the official body charged with issuing accounting standards. Required: a. Discuss the structure of the FASB. b. How are the Financial Accounting Foundation members nominated?
> The proprietary theory, the entity theory, and the funds theory are three approaches to accounting for equities. Required: a. Describe briefly each of these theories. b. State your reasons for emphasizing the application of one of these theories to each
> Company A and Company B each have a $10,000 bond outstanding. Required: a. If both companies’ bonds are due in ten years, what factor(s) might make the bond market value the Company A bond at an amount greater than the Company B bond? If so, would Compan
> Gabel Company spent money to train its employees so that they can be productive workers. Such expenditures are often referred to as investments in human capital. Required: a. Do you think that Gabel Company’s trained employees meet the definition of an a
> Your company owns a building that is fully paid for. Explain how the building meets the definition of an asset under each of the following scenarios. Required: a. Your company is using the building as a plant that is producing automobiles. b. Your compan
> Continuity is often cited as a basic accounting postulate that affects how a company presents information in published financial statements. Required: a. How did Sprouse and Moonitz describe continuity? b. Given the presumption of continuity, if you are
> Sprouse and Moonitz proposed that quantification is an element of the economic environment that is relevant for accounting. Required: a. Explain why Sprouse and Moonitz say that quantification is relevant. b. Discuss how the Sprouse and Moonitz discussio
> During the past several years, the FASB has attempted to strengthen the theoretical foundation for the development of accounting principles. Two of the most important results of this attempt are the Conceptual Framework Project and the Emerging Issues Ta
> Which Body Should Set Accounting Standards in the United States? Team Debate: Team 1: Argue that the SEC should set accounting standards in the United States. Team 2: Argue that the FASB should set accounting standards in the United States
> Should the Scope of Accounting Standards Be Narrowed Further? Team Debate: Team 1: Assume you are management. Argue against the narrowing of accounting choices. Team 2: Assume you are a prospective investor. Argue for the narrowing of accounting choices.
> The FASB ASC is now the sole authoritative source for all U.S. GAAP. Required: a. What are the major goals of the FASB ASC? b. How is the FASB ASC expected to improve the practice of accounting? c. What literature is now contained in the FASB ASC? d. Wh
> The FASB is the official body charged with issuing accounting standards. Required: a. Discuss the structure of the FASB. b. How are the Financial Accounting Foundation members nominated?
> On January 1, 2016, as an incentive to improved performance of duties, Recycling Corporation adopted a qualified stock option plan to grant corporate executives nontransferable stock options to 500,000 shares of its unissued $1 par value common stock. Th
> During the early 2000s, the role of accounting and the auditing profession changed, and several accounting scandals were uncovered. Required: a. What conditions caused accounting and the auditing profession role to change during this time? b. What major
> The nineteenth century witnessed the evolution of joint ventures into business corporations. Required: Discuss how the emergence and growth of the corporate form of business affected perceptions regarding the role of the accounting profession in financia
> At the completion of the Darby Department Store audit, the president asks about the meaning of the phrase “in conformity with generally accepted accounting principles,” which appears in your audit report on the management’s financial statements. He obser
> Some accountants have said that politicalization in the development and acceptance of generally accepted accounting principles (i.e., standard setting) is taking place. Some use the term politicalization in a narrow sense to mean the influence by govern
> The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective a
> On October 2004, the FASB and IASB decided to add to their agendas a joint project to develop an improved and common conceptual framework that is based on and builds on their existing frameworks. Required: a. What is the goal of this project? b. List and
