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Case using the FASB Accounting Standards Codification Due Apr. 24, 2014

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Accounting 325: Case using the FASB Accounting Standards Codification;Due Apr. 24, 2014;Soon after beginning the year-end audit work on Oct 24th at the Wallenda Company, the auditor has the following conversation with the controller.;Controller: The year ended October 31st should be our most profitable in history and, as a consequence, the Board of Directors has just awarded the officers generous bonuses.;Auditor: I thought profits were down this year in the industry, according to your latest interim report.;Controller: Well, they were down but 10 days ago we closed a deal that will give us a substantial increase for the year.;Auditor: 0h, what was it?;Controller: Well, you remember a few years ago our former president bought stock in Pearson Enterprises because he had grandiose ideas about becoming a conglomerate. For six years we have not been able to sell this stock, which cost us $3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Union City, Inc. for $4,000,000. So we have a gain of $700,000 ($1,000.000 pretax) which will increase our net income for the year to $4,000,000 compared with last year?s $3,800,000. As far as I know, we?ll be the only company in the industry to register an increase in net income this year. That should help the market value of the stock!;Auditor: Do you expect to receive the $4,000,000 in cash by Octobrt 31st, your fiscal year end?;Controller: No. Although Union City is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a $4,000,000 noninterest-bearing note due $400,000 per year for the next 10 years. The first payment is due on March 31 of next year.;Auditor: Why is the note noninterest-bearing?;Controller: Because that?s what everybody agreed to. Since we don?t have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on Pearson Enterprises stock.;REQUIRED: Do you agree with the way the controller has accounted for the transaction? If not, how should the transaction be accounted for? Some questions to be considered;1. What was the value of stock--when it was purchased and when it was sold?;2. Given the uncertainty surrounding the collectability of the note, did an exchange occur? How do we account for the different scenarios, exchange or no exchange?;3. What goes into determining an interest rate?;4. What is the value of the note? Why does it matter and how do we account for it?;5. What is the value of the gain/loss and how does it effect net income?;Your response should be typed, double spaced, and no more than two pages in length.

 

Paper#20827 | Written in 18-Jul-2015

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