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You are a summer intern working on the audit of the Philadelphia

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Question;Case 12-06Philadelphia CommunicationsYou are a summer intern working on the audit of the Philadelphia Communications Inc.(?Philly?). Philly is a public company that completed an initial public offering (IPO) afew months ago. Decedents of the founding family headed by John Sigar, the eldestgrandchild and current CEO of the company, still own a significant amount of thecompany?s stock. Mr. Sigar as CEO and member of the board of directors is the onlyfamily member still involved in the business.You have been assigned to help test accounts receivable. Specifically, you are going totest receivables from shareholders. It is your first time doing audit testing, so you havebeen reviewing the prior year?s audit working papers to make sure you understand howthings work. There are a number of notes receivable from several of Mr. Sigar?s cousins.They have taken advances frequently over the years and have never failed to repay noteswhen they came due. These notes are secured by shares of Philly?s convertible preferredstock purchased by the family members following the IPO. The receivable supportprovided by the client does not specify interest or payment terms for these notes.You remember from your first semester in intermediate accounting that there are somespecial presentation or classification issues regarding these sorts of receivables. Youunderstand the family members are considered ?related parties? and there are some extradisclosures required as a result. You are also pretty sure there is something else that iskey here, but you cannot quite put your finger on it.You have reviewed your old notes on revenue recognition since that is a big part ofauditing receivables. You have also looked over Chapter 7 of your old ?Kieso? textbook,but there is nothing included on this sort of situation. There is nothing in Philly?s auditpapers from last year because this is the first year the family members have borrowedfrom Philly in the form of secured notes. You do not think collectibility is an issueprimarily because (1) the Sigars are very wealthy and (2) the preferred stock that securesthe notes is worth a good deal more than the amounts due.Required:1. Complete your preparation to test accounts receivable by reviewing the FASBAccounting Standards Codification and identify any special presentation ordisclosure issues applicable to the above described situation. Be prepared todiscuss the following:a. Applicable Codification references.b. Related presentation and disclosure issues for the notes.c. Any additional clarifying information needed from companymanagement.2. In anticipation of a follow-up question from the engagement partner (whohappens to be the local office ?expert? on IFRSs), what guidance can you find toaddress this situation from an international accounting standpoint?

 

Paper#39882 | Written in 18-Jul-2015

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