Accounting and audit research project

For the following cases:

(1) Cite your sources, for example, “asc.fasb.org 505-30-25-3”.

(2) Answer the question being asked as clearly and concisely as possible. Be
thorough but don’t write the next “Great American Novel”.
CASE #1
Mead Motors purchases an automobile for its new car inventory from Generous Motors. Generous
Motors finances this transaction through its financial subsidiary, Generous Motors Credit Company
(GMCC). Mead pays no funds to GMCC until it sells the automobile. At point of sale, Mead must then
repay the balance of the loan plus interest to GMCC.
How should Mead report the acquisition and repayment transactions in its Statement of Cash Flows?
CASE #2
Narda Corporation agreed to sell all of its capital stock to Effie Corporation for three monthly
payments of $200,000 each. After Effie made the first required payment, Effie ceased making any other
payments. The stock subscription agreement states that Effie, thus, forfeits its payments and is entitled
to no other future consideration.
How should Narda record the $200,000 forfeited payment?
CASE #3
Lowland Appliances Stores offers customers purchasing its appliances separately priced (extended)
warranties. Lowland services these extended warranties. Its customers can receive no refunds for not
using these warranties, and, of course, Lowland must honor these contracts—regardless of any future
costs in doing so. Lowland also “tracks” the profits and losses these types of warranties generate by
appliance category—in order to help maintain a competitive price and costing structure.
How should Lowland recognize the revenues and expenses of such extended warranties?
CASE #4
As of January 1, 2014, the Lohse Company owes the First Arbor Bank $350,000 which is due on
December 31, 2014. Since Lohse seems unable to repay the note, the bank agreed that Lohse can
“settle” this balance by agreeing to make four, annual installments in each of the next four years.
However, Lohse must agree to add a “due on demand”clause to the note. Specifically, First Arbor Bank
(the lender) will “do its best” not to call the note “provided that no adverse significant shift in Lohse
Company’s operations occur.” However, First Arbor Bank has the sole discretion to (1) ascertain if
these adverse conditions arose and (2) then call the note due immediately.
How should Lohse account for this situation?
CASE #5

On January1, year 1, Melvin Corporation promises to “unconditionally” transfer a building that cost
$100,000 (appraised recently at $300,000) to the Vivian Company on January 1, year 2, in exchange
for a boat that Vivian Company bought for $250,000. As of December 31, year 2, Melvin Corporation
still has not transferred title to the building, although Melvin Corporation has received title to the boat.
How should Vivian Company record these transactions?
How should Melvin Corporation record these transactions?

CASE #6
Herb Construction Company is building a hotel for speculative purposes. That is, the Company has not
yet found a buyer for the hotel, but expects to do so within a few months. Herb, who expects to spend
about another two years to complete construction of the hotel, asks his accountant if interest and
property taxes associated with this construction site should be capitalized or expensed.
Should Herb capitalize or expense the interest and property taxes?
What rate of interest should Herb use?
CASE #7
In order to help induce Jill Gregory to remain as president of the Reed Company, in year 2000 Reed
Company promises to pay Jill (or her estate) $200,000 per year for the next 15 years—even if she
leaves the company or dies. Reed Company wants to properly record this transaction as deferred
compensation, but is insure of how many years it should use to amortize this cost.
Over how many years should Reed Company amortize these payments?
Reed Company also purchased a “whole life” life insurance policy on Jill, naming the company as the
sole beneficiary.
Can Reed Company offset the cash surrender value of the life insurance policy against the deferred
compensation liability?
CASE #8
The Bootsie Holding Company has sales exceeding $10 billion and each of its three, wholly-owned
subsidiaries has sales exceeding $2 billion. Three years ago, the subsidiaries had “complex” capital
structures---until Bootsie acquired them. Bootsie’s annual report shows its consolidated income and
individual income statement accounts for each of the three subsidiary companies.
Should Bootsie also report separate earnings-per-share balances for the three subsidiary companies?

CASE #9
Leila Company began a three year operating lease arrangement with Debco Industries. The lease was
slated to begin on January 1, at monthly lease payments of $10,000. However, Debco’s negligence
prevented Leila from moving into the building on time. Debco had failed to clean up the building
adequately enough to earn a Certificate of Occupancy from the township in which the building is
located. On January 1, Leila spent $5,000 for leasehold improvements on this building. These
improvements enabled Leila, on April 1, to obtain the needed Certificate of Occupancy. Leila paid
Debco all the required lease payments and has decided not to pursue legal action for the “un-ready”
building.
Can Leila defer the $30,000 (January through March) lease payments over the remaining 33 months of
the lease contract?
CASE #10
After the Julie Company issued its previous year’s financial statements, it noticed that it incorrectly
calculated depreciation expense and, thus, disclosed this fact as a prior period adjustment in its current
year’s financial statements. This difference did not affect any cash balances, since Julie had operating
losses for both years. However, Julie did not issue comparative financial statements in the current year.
How should Julie Company disclose this prior period adjustment in its current year’s Statement of Cash
Flows?
CASE #11
Albright, Inc., has recently issued a 10% stock dividend to its existing stockholders. As a result of the
issuance of the stock dividend, the market price of the stock declined 25%.
Would it be acceptable under GAAP for Albright to treat this stock dividend as a stock split?
CASE #12
The Builtwell Construction Company is building a hospital for a third party. Builtwell borrows
substantial funds from a foreign bank and pays the required interest costs as scheduled. Builtwell also
incurs some foreign currency transaction gains and losses on these transactions. Builtwell properly
amortizes the interest costs over the life of the construction project, but would now also like to
amortize the associated foreign currency transaction gains and losses as well.
Can Builtwell amortize the associated foreign currency transaction gains and losses?
CASE #13

On January 1, year 1, the Allen Company issues 100,000 shares of its stock (which is valued at $10 per
share) to acquire the Natie Company. The purchase agreement also states that Allen will pay $200,000
in year 2 if Natie has net income of at least $400,000 in year 2. There is a 50% chance Natie will meet
or exceed $400,000 of net income for year 2.
How should Natie recognize this transaction?
CASE #14
In year 1, Joe Josephs, CPA, reviewed Lander Company’s financial statements. However, in year 2, the
Lander Company hired Tom Holstrum, CPA, to audit its financial statements.
Should Tom meet with Joe?
Would Joe be considered a predecessor auditor?
CASE #15
In Tom Holstrum’s audit of the Lander Company, Tom seeks to obtain an attorney representation letter
regarding any undisclosed potential corporate liabilities. John Engle, the Lander Company General
Council, responded to this letter by citing American Bar Association (ABA) language that emphasizes
attorney-client privilege regarding such unasserted claims. E.g., the letter uses such phrases as “it
would be inappropriate for this firm to respond to such general inquiries” and “we cannot comment
upon the adequacy of the company’s listing, if any, of unasserted possible claims or assessments.”
Do such responses constitute limitations in the scope of the audit?
CASE #16
Mary Howard, CPA, has audited the Wheat City Grain Company’s financial statements for many
years.. Much of Wheat City’s assets consist of wheat stored in three of its grain elevators, and the
Company maintains perpetual inventory records for the quantity of wheat stored there. Concurrently,
on a surprise basis, at different times each month, state grain inspectors also “count” the quantity of
wheat found in these elevators---and have found no material differences in the perpetual records over
the past five years. To save both time and audit fees, Mary wants to rely on the state inspectors’ counts
instead of making her independent counts.
Can Mary do this?
CASE #17
Aaron Jones, CPA, is auditing the current year’s financial statements of Low Company, a publicly
traded company. Aaron notices some major fluctuations in Low’s fourth quarter of the previous year’s
financial statement balances. He is aware that security holders of publicly traded company stock that
does not separately report fourth quarter results often “impute” such results by subtracting data based

on third quarter interim balances from the year-end balances. Thus, companies should report such
significant events as disposals of segments and other unusual items for that quarter as a note to the
annual financial statements.
Aaron notices that Low makes such disclosures but is unsure if his firm should audit these additional,
supplementary disclosures.
Should Aaron audit these supplementary fourth quarter disclosures?
What other steps, if any, should Aaron perform in this regard?
CASE #18
Joe Josephs, CPA, issued an unqualified audit opinion for the Johnson Company’s previous year’s
financial statements, which used a modified accrual basis of accounting (which is considered to be “an
other comprehensive base of accounting (OCBOA)”). In the current year, Johnson switched to a
(normal, full) accrual system, and wants to show comparative financial statements for the two years.
Should Joe require the restatement of the prior year’s financial statements using this new basis of
accounting ?
What disclosures, if any, should be made to the financial statements and Joe’s audit report?
CASE #19
Hugo Crossman, CPA, issued a review statement for the CUNY Company for last year and a compiled
statement in the current year. During the current year, Hugo purchased some CUNY securities, which
made him lose his independence—a fact noted in his CPA compilation report. Now, the CUNY
Company management wants Hugo to issue comparative two year financial statements (last year and
this year).
Can Hugo re-issue his review report now that he is no longer independent of the CUNY Company?
CASE #20
Joseph Johnson is completing his audit of the Bolton Company’s current year’s financial statements
and reads in SAS 114 (AU Section 380) that he should communicate his results with members of
Bolton’s audit committee. Despite many requests for many years, Bolton has established no such
committee—primarily because it has only two stockholders.
What should Joseph do now?