The following letter was sent to the SEC and the FASB by leaders of the business community.

Dear Sirs:

The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.

As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies’ ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.

We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation’s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.

We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies’ risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission’s oversight responsibilities.

We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in the international marketplace.

	Very truly yours,
	(This letter was signed by the chairs of 22 of the largest U.S. companies.)

Answer the following questions.

1. Explain the “due process” procedures followed by the FASB in developing a financial reporting standard.

2. What is meant by the term “economic consequences” in accounting standard-setting?

3. What economic consequences arguments are used in this letter?

4. What do you believe is the main point of the letter?

5. Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

On January 1, 2017, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,295,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $880,000, retained earnings of $430,000, and a noncontrolling interest fair value of $555,000. Corgan attributed the excess of fair value over Smashing's book value to various covenants with a 20-year remaining life. Corgan uses the equity method to account for its investment in Smashing.

During the next two years, Smashing reported the following:

	Net Income			Dividends Declared			Inventory Purchases from Corgan
2017	$	330,000		$	53,000		$	280,000
2018		310,000			63,000			300,000

Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2017 and 2018, 50 percent of the current year purchases remain in Smashing's inventory.

1. Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2018.
2. Prepare the worksheet adjustments for the December 31, 2018, consolidation of Corgan and Smashing.

1. Purchases and Cash Payments Journals

   Happy Tails Inc. has a September 1, 20Y4 accounts payable balance of $815, which consists of $520 due Labradore Inc. and $295 due Meow Mart Inc. Transactions related to purchases and cash payments completed by Happy Tails Inc. during the month of September 20Y4 are as follows:

   Sept. 4.	Purchased pet supplies from Best Friend Supplies Inc. on account, $350.
   Sept. 6.	Issued Check No. 345 to Labradore Inc. in payment of account, $520.
   Sept. 13.	Purchased pet supplies from Poodle Pals Inc., $1,005.
   Sept. 18.	Issued Check No. 346 to Meow Mart Inc. in payment of account, $295.
   Sept. 19.	Purchased office equipment from Office Helper Inc. on account, $3,435.
   Sept. 23.	Issued Check No. 347 to Best Friend Supplies Inc. in payment of account from purchase made on September 4.
   Sept. 27.	Purchased pet supplies from Meow Mart Inc. on account, $535.
   Sept. 30.	Issued Check No. 348 to Sanders Inc. for cleaning expenses, $75.

   Happy Tails Inc. uses the following accounts:

   Cash	11
   Pet Supplies	14
   Office Equipment	18
   Accounts Payable	21
   Cleaning Expense	54

   a. Prepare a purchases journal and a cash payments journal to record these transactions in chronological order. If an amount box does not require an entry, leave it blank.

   If no entry is required in "Other Accounts Dr." then select "No entry required".

   PURCHASES JOURNAL							PAGE 16
   DATE	Account Credited	Post. Ref.	Accounts Payable Cr.	Pet Supplies Dr.	Other Accounts Dr.	Post. Ref.	Amount
   20Y4
   		✔
   		✔
   		✔
   		✔
   			()	()

   CASH PAYMENTS JOURNAL						PAGE 22
   DATE	Ck. No.	Account Debited	Post. Ref.	Other Accounts Dr.	Accounts Payable Dr.	Cash Cr.
   20Y4
   			✔
   			✔
   			✔
   					()	()

   b. Prepare a listing of accounts payable creditor balances on September 30, 20Y4. Verify that the total of the accounts payable creditor balances equals the balance of the accounts payable controlling account on September 30, 20Y4.

   Happy Tails Inc.
   Accounts Payable Creditor Balances
   September 30, 20Y4
   Meow Mart Inc.	$
   Poodle Pals Inc.
   Office Helper Inc.
   Total creditor (supplier) accounts	$

   c. Happy Tails Inc. uses a subsidiary ledger for accounts payable for all of the following reasons EXCEPT:

The Charleston Metropolitan Transit System (CMTS) is facing an extreme financial crisis. Although federal subsidies make up some of the deficits not covered by fares, it is also necessary to cover some of the costs through local tax collections. For the past four years, these costs have been met through local sales and property taxes. Assume that your firm, Derrick Cheatham, and John, has been asked to serve as a consultant on future financing of CMTS’s operating deficit. In that capacity, please answer the following questions.

a. What criteria would you recommend for judging alternative taxing mechanism for meeting CMTS deficits?

b. Using the criteria you have established in part (a) evaluate the current form of tax collections.

Assume that you are the CEO of a small publicly traded company. The operating performance of your company has fallen below market expectations, which is reflected in a depressed stock price. At your direction, your CFO provides you with the following recommendations that are designed to increase your company’s return on net operating assets (RNOA) and your operating cash flows, both of which will, presumably, result in improved financial performance and an increased stock price. , LO#2.1 #3.1 1. To improved net cash flows from operating activities, the CFO recommends that your company reduce inventories (raw material, work-in-process, and finished goods) and receivables (through selective credit granting and increased emphasis on collection of past-due accounts). 2. The CFO recommends that your company sell and lease back its office building. The lease will be structure so as to be classified as an operating lease under GAAP. The assets will, therefore, not be iincluded in the computation of the net ooperating assets (NOA), thus increasing RNOA. Evaluate each of the CFO recommendations. In your evaluation consider whether the recommendation will positively impact the operating pperformance of your company or whether it is cosmetic in nature.

1. On January 1, 2020, Ironman Steel issued $900,000, 8-year bonds for $990,000. The stated rate of interest was 9% and interest is paid annually on December 31.

   Required:

   Prepare the amortization table for Ironman Steel's bonds. If required, round your answers to nearest whole value. If an amount box does not require an entry, leave it blank and if the answer is zero, enter "0".

   Ironman Steel
   Amortization Table
   Period	Cash Payment (Credit)	Interest Expense (Debit)	Premium on Bonds Payable (Debit)	Premium on Bonds Payable Balance	Carrying Value
   At issue	$	$	$	$	$
   12/31/20
   12/31/21
   12/31/22
   12/31/23
   12/31/24
   12/31/25
   12/31/26
   12/31/27					An amortization table helps calculate the proper amortization of bond premium or discount. They are particularly helpful when the effective interest rate method is used; however, this problem amortizes the premium using the straight-line method.

At the beginning of 2017, your company buys a $28,000 piece of equipment that it expects to use for 4 years. The equipment has an estimated residual value of 2,000. The company expects to produce a total of 200,000 units. Actual production is as follows: 45,000 units in 2017, 47,000 units in 2018, 53,000 units in 2019, and 55,000 units in 2020.


Required:

1. Determine the depreciable cost.
2. Calculate the depreciation expense per year under the straight-line method.
3. Use the straight-line method to prepare a depreciation schedule.
4. Calculate the depreciation rate per unit under the units-of-production method.
5. Use the units-of-production method to prepare a depreciation schedule.

Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs:

	Fixed Cost per Month			Cost per Car Washed
Cleaning supplies				$	0.50
Electricity	$	1,400		$	0.07
Maintenance				$	0.30
Wages and salaries	$	4,100		$	0.40
Depreciation	$	8,400
Rent	$	2,000
Administrative expenses	$	1,500		$	0.02

For example, electricity costs are $1,400 per month plus $0.07 per car washed. The company expects to wash 8,000 cars in August and to collect an average of $6.70 per car washed.

  

The actual operating results for August appear below.

  

Lavage Rapide Income Statement For the Month Ended August 31
Actual cars washed		8,100
Revenue	$	55,700
Expenses:
Cleaning supplies		4,500
Electricity		1,930
Maintenance		2,640
Wages and salaries		7,660
Depreciation		8,400
Rent		2,200
Administrative expenses		1,560
Total expense		28,890
Net operating income	$	26,810

Required:

Complete the flexible budget performance report that shows the company’s activity variances and revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs:

	Fixed Cost per Month			Cost per Car Washed
Cleaning supplies				$	0.50
Electricity	$	1,400		$	0.07
Maintenance				$	0.30
Wages and salaries	$	4,100		$	0.40
Depreciation	$	8,400
Rent	$	2,000
Administrative expenses	$	1,500		$	0.02

For example, electricity costs are $1,400 per month plus $0.07 per car washed. The company expects to wash 8,000 cars in August and to collect an average of $6.70 per car washed.

  

The actual operating results for August appear below.

  

Lavage Rapide Income Statement For the Month Ended August 31
Actual cars washed		8,100
Revenue	$	55,700
Expenses:
Cleaning supplies		4,500
Electricity		1,930
Maintenance		2,640
Wages and salaries		7,660
Depreciation		8,400
Rent		2,200
Administrative expenses		1,560
Total expense		28,890
Net operating income	$	26,810

Required:

Complete the flexible budget performance report that shows the company’s activity variances and revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

If you were a loan officer at a bank and the owner approached you for a loan, what information would you require to help make your decision ?

Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs:

	Fixed Cost per Month			Cost per Car Washed
Cleaning supplies				$	0.80
Electricity	$	1,100		$	0.07
Maintenance				$	0.30
Wages and salaries	$	4,900		$	0.20
Depreciation	$	8,100
Rent	$	1,800
Administrative expenses	$	1,300		$	0.05

For example, electricity costs are $1,100 per month plus $0.07 per car washed. The company expected to wash 8,200 cars in August and to collect an average of $6.60 per car washed. The company actually washed 8,300 cars.

The actual operating results for August appear below.

  

Lavage Rapide Income Statement For the Month Ended August 31
Actual cars washed		8,300
Revenue	$	56,220
Expenses:
Cleaning supplies		7,060
Electricity		1,644
Maintenance		2,700
Wages and salaries		6,900
Depreciation		8,100
Rent		2,000
Administrative expenses		1,610
Total expense		30,014
Net operating income	$	26,206

Required:

Compute the company's activity variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Lavage Rapide Activity Variances For the Month Ended August 31 Revenue Expenses: Cleaning supplies Electricity Maintenance Wages and salaries Depreciation Rent Administrative expenses Total expense Net operating income

129. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement allocates income and losses equally among the partners. The current period's ending capital account balances are Masters, $16,300, Hardy, $16,300, Rowen, $(3,300). After all the assets are sold and liabilities are paid, but before any contributions to cover any deficiencies, there is $29,300 in cash to be distributed. Rowen pays $3,300 to cover the deficiency in his account. The general journal entry to record the final distribution would be:

• Debit Masters, Capital $14,650; debit Hardy, Capital $14,650; credit Cash $29,300.

• Debit Masters, Capital $9,766; debit Hardy, Capital $9,767; debit Rowen, Capital $9,767; credit Cash $29,300.

• Debit Cash $29,300; debit Rowen, Capital $3,300; credit Masters, Capital $16,300; credit Hardy, Capital $16,300.

• Debit Masters, Capital $16,300; debit Hardy, Capital $16,300; credit Rowen, Capital $3,300; credit Cash $29,300.

• Debit Masters, Capital $16,300; debit Hardy, Capital $16,300; credit Cash $32,600.

130. Cox, North, and Lee form a partnership. Cox contributes $204,000, North contributes $170,000, and Lee contributes $306,000. Their partnership agreement calls for a 6% interest allowance on the partner's capital balances with the remaining income or loss to be allocated equally. If the partnership reports income of $208,800 for its first year, what amount of income is credited to Lee's capital account?

• $74,360.

• $69,600.

• $66,200.

• $68,240.

• $56,000.

138. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months. After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

• $3,340,063.

• $3,780,000.

• $3,782,437.

• $3,217,563.

• $3,902,500.

144. Caitlin, Chris, and Molly are partners and share income and losses in a 3:4:3 ratio. The partnership’s capital balances are Caitlin, $140,000; Chris, $100,000; and Molly, $120,000. Paul is admitted to the partnership on July 1 with a 20% equity and invests $180,000. The balance in Paul’s capital account immediately after his admission is:

• $108,000

• $72,000

• $360,000

• $540,000

• $180,000

Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,500,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,500,000 francs in three months. Maas selects a strike price of $0.63 per franc when the spot rate is $0.63 and pays a premium of $0.005 per franc. The spot rate increases to $0.634 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.65, resulting in a fair value for the option of $30,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements.

1. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.

2. What is the overall impact on net income over the two accounting periods?

3. What is the net cash outflow to acquire the raw materials?

On December 31, 2017, American Bank enters into a debt restructuring agreement with Stellar Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,000,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $4,000,000 to $3,200,000.
2.		Extending the maturity date from December 31, 2017, to January 1, 2021.
3.		Reducing the interest rate from 12% to 10%.

Assuming that the interest rate Stellar should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Stellar Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.)

Prepare the interest payment entry for Stellar Company on December 31, 2019. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

What entry should Stellar make on January 1, 2021? (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Write a little scenario explaining a way that you could commit payroll/HR fraud.

Explain what types of internal controls could prevent that fraud from occurring.

Duff incorporated on January 1, 2015 after receiving authorization to issue 10,000 shares of $50 par value preferred stock and 100,000 shares of $10 par value common, with the former having an 8% cumulative dividend feature. During fiscal 2018, the company engaged in the following equity transactions: January 1 Issued 1,000 shares of preferred stock for $80 each. January 1 Issued 10,000 shares of common stock for $30 each. June 30 Bought 1,000 shares of common stock for the treasury at $40 each. December 31 Declared the 8% dividend on the preferred stock and a $1.00 per-share dividend on the common after determining its fiscal 2018 comprehensive income to be $500,000, of which, $510,000 represented net income.

Required—Prepare in good form the stockholders’ equity section for 2015