Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization. In preparing the consolidated financial statements for the year ended December 31, 2016, what is the consolidation entry adjustment?

Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization.

In preparing the consolidated financial statements for the year ended December 31, 2016, what is the consolidation entry adjustment?

Assume that a parent company owns 80 percent of its subsidiary. The parent company uses the equity method to account for its investment in subsidiary. On January 1, 2012, the parent company issued to an unaffiliated company $1,000,000 (face value) 10 year, 10 percent bond payable for a $61,000 premium. The bonds pay interest in December 31 of each year. On January 1, 2015, the subsidiary acquired 40 percent of the bonds for $386,000. Both companies use straight-line amortization.

In preparing the consolidated financial statements for the year ended December 31, 2016, what is the consolidation entry adjustment?

Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors. Barry is in the process of auditing Rooster's financial statements for the year ended December 31, 2019. He just discovered a related-party transaction that has him worried. For one thing, the relationship has existed for the past two years, but Barry did not discover it. What's just as troubling is that the client hid it from him. Rooster bought out Hen Sportswear two years ago but still operates it as a separate entity, and since then has systematically failed to disclose to the private investors related-party transactions involving the CEO of Rooster, Frank Footer. It seems that Footer is borrowing money from Hen and is deeply in debt to the CEO of that company, who is his brother-in-law. Also, Hen has hired relatives of Footer, most of whom are unqualified for their jobs, and pays them an above-market salary. This has been hidden from Barry as well. Barry was informed by an anonymous tipster that Rooster operates a secret off-balance-sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses, an apartment rental for Footer, and cash and noncash gifts to local government officials to "grease the wheels" when permits need to be expedited in favor of Rooster. Barry doesn't know what to make of it, because he is too focused right now on the related-party transactions with Hen Sportswear. Barry is in the process of questioning Hans Burger, CPA, who is the CFO of Rooster, about these transactions. Burger explains that he had raised these issues with Footer but was instructed in no uncertain terms to leave them alone. He did just that. Burger told Barry he needed this job and wouldn't jeopardize it out of a sense of "ethics." Barry is in his office back at the firm and reflecting on how best to handle this matter.

Questions

3. Has fraud been committed in this case? Explain. If so, what are Barry's obligations in this regard?

Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors. Barry is in the process of auditing Rooster's financial statements for the year ended December 31, 2019. He just discovered a related-party transaction that has him worried. For one thing, the relationship has existed for the past two years, but Barry did not discover it. What's just as troubling is that the client hid it from him. Rooster bought out Hen Sportswear two years ago but still operates it as a separate entity, and since then has systematically failed to disclose to the private investors related-party transactions involving the CEO of Rooster, Frank Footer. It seems that Footer is borrowing money from Hen and is deeply in debt to the CEO of that company, who is his brother-in-law. Also, Hen has hired relatives of Footer, most of whom are unqualified for their jobs, and pays them an above-market salary. This has been hidden from Barry as well. Barry was informed by an anonymous tipster that Rooster operates a secret off-balance-sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses, an apartment rental for Footer, and cash and noncash gifts to local government officials to "grease the wheels" when permits need to be expedited in favor of Rooster. Barry doesn't know what to make of it, because he is too focused right now on the related-party transactions with Hen Sportswear. Barry is in the process of questioning Hans Burger, CPA, who is the CFO of Rooster, about these transactions. Burger explains that he had raised these issues with Footer but was instructed in no uncertain terms to leave them alone. He did just that. Burger told Barry he needed this job and wouldn't jeopardize it out of a sense of "ethics." Barry is in his office back at the firm and reflecting on how best to handle this matter.

Questions

1. Who are the stakeholders in this case and what are Barry's obligations to them?

In 2009, Roche Holding AG (Roche) made an offer to acquire all remaining outstanding shares of US biotechnology company Genentech. To pay for the deal, Roche planned to sell a record $32 billion in bonds at various maturities from 1 year to 30 years, and in three different currencies (USD, Euro, British pound). For simplicity, let us assume they only issue 10 year dollar-denominated bonds. The 10 year interest rates on corporate bonds, and the median earnings to interest expense ratios (EBITDA/interest expense coverage ratio) for US rated industrial companies at the time were as follows:

Rating	Interest rate	Coverage ratio
AAA	4.0%	114.0
AA	4.9%	44.0
A	5.6%	12.8
BBB	7.0%	8.2

With the acquisition of Genentech, suppose we project that Roche will have earnings (EBITDA) of $23 billion, and their interest expense will be $32 billion (the debt) times the interest rate. If we use the coverage ratio to estimate the bond rating, and we use the bond rating to estimate the interest rate, what rating will we assign to Roche's debt?

AAA

AA

A

BBB

Every business owner has an expertise.

They know how to provide goods, provide services,

and they typically know how to sell those.

They're really good at doing that.

They do not have an expertise in management of finances

and it's also not only not their expertise,

but they don't like doing it.

They need somebody almost like everybody needs a doctor,

but we don't need to go to medical school to do that.

Right? We just go to the doctor.

So people need a financial doctor every once in a while.

[ Music ]

>> B2B CFO is a partnership where we support executives

and CEOs to help them sleep better at night, by helping them

with their cash and profits.

I believe that young or small business owners should

understand their financial statements.

One of the key things that they need

to understand is how profitable they are.

They also need to understand what's driving profitability?

These things speak volumes to a bank

or to a lender, to an investor.

And if they don't understand those things, they're going

to have a hard time getting any capital to be able

to survive in the future.

>> Hosco Fittings manufacture stainless steel, cavity-free,

smooth-bore fittings, hosing and tubing, and accessories used

in fluid handling systems

for paint coatings and other materials.

>> Tom Murray is one of my clients.

He is the owner and CEO of Hosco Fittings.

>> My objective and the plan was to work for the rest

of my career at a large multinational corporation.

I would've been quite happy to do that.

I worked at Ford Motor Company for a while

and then eventually worked at ITW,

a very large multinational company, and Hosco was one

of the many brands that they had in their portfolio at the time.

It was determined by the bigger parent company

that it didn't fit.

It wasn't one of their core priorities.

So they decided to divest it.

>> I worked with him to develop the financial projections

that were needed in order to go out to banks.

>> We purchased the company and the business

and have been running it independently since then.

>> Oftentimes, for owners and CEOs,

they don't truly understand how the financials work,

but clearly Tom Murray did.

He understood it and he got it.

>> So this is our primary manufacturing facility

in Livonia, Michigan.

I can take you around and show you some of what we do here.

We're a very small business.

We have a total of ten people here.

We start with body blanks.

In this case, we're making ball valves used to close

or open the supply of fluid.

These are some of the hard assets that we have.

Here, we're inventorying hose and tubing

for the fluid handling system.

We could never afford to have someone

of Sheri's [assumed spelling] caliber as a full-time employee.

It was a perfect fit for us to have someone of her caliber,

her abilities to work with us.

>> So at this point let's go ahead

and we'll review the monthly financials for the month of May.

Some of the reports that I review with my owners

on a monthly basis are the monthly key metrics

for the current month.

We look at their income statement for the current month.

We look at the income statement for calendar year

to date and calendar year.

We can also look at the income statement

by month going forward.

So operating cash flow was strong.

It was above where our budget was,

the things that are driving that,

so inventory month on hand.

>> We meet on a monthly basis

for several hours to review financials.

She spends additional time throughout the month reviewing

some of our metrics and we share data back and forth.

So I would say on average it's probably ten

to 12 hours a month.

>> Some of this stuff is interesting for me,

because it has more of a trend wise, right,

what things that we're spending money on

and what things are we not.

On the income statement,

I'll show you top-line sales or revenues.

It will show you expenses.

So it's the answer to if you're making money

or if you're not making money at your business.

Then there's the balance sheet.

The balance sheet is kind of the offset to the income statement.

It shows an owner what do they own and how much

of it do they own with their own money and how much

of it do they own with somebody else's money.

Okay, so if we look at cash,

the accounts receivable days are at 70 days.

The accounts payable days are also in line

with where they should be.

>> Here on the floor sort of rolls

up into the financial statements that we look

at on a monthly basis, whether it's our working capital,

the inventory we have on the shelf, the labor and the people

who are out here doing the job, picking, manufacturing things,

the assets, the machine tools and equipment,

it all comes together out here on the floor.

[ Music ]

>> They shouldn't, in my mind, be looking at all the detail

that comes out of, say, QuickBooks.

[Background Music] They need to understand cash,

because if they ever expect to grow past, you know,

that one person with the laptop who has an Internet website,

they're going to need cash at a minimum for marketing

or for outside support.

So we're in a solid position

with operating cash flow going throughout the year.

>> We own the machinery and equipment.

And if we don't own it, the bank does.

So we have to make sure that we service our debt,

we're able to pay our taxes, make sure we make payroll.

>> It's been my experience that most business owners,

when I say most, 80 or 90%, do not understand cash flow

and the risks associated with cash flow.

That's not their passion.

Their passion is providing a good

or service or creating things.

We're talking about entrepreneurs.

We're talking about the geniuses of our society, actually.

And these geniuses are not interested in cash flow.

There is an assumption going in that everybody's going to be

so happy that they're just going to throw money at us

and it's just going to go in the bank

and then somebody's going to take care of it.

>> Being a small business owner is not all fun and games.

There are a lot of things that can keep you up at night.

It is very rewarding and exciting to be part of something

that you know at the end of today you've created

and done something that's good for you

and for everyone else involved in the business.

>> On a daily basis, I am helping owners be able

to realize their dream and the impact is immediate.

Can you guys think of anything else that's extraordinary

that we should be planning for on cash?

B2B CFO works with small and medium-sized companies to help them attain a clearer picture of their goals and finances. For companies unable to afford a full-time chief financial officer, B2B CFO is the ideal solution. With over twenty years of experience, the founder and CEO, Jerry Mills, has steadily built the largest supplier of temporary CFOs, helping growing companies understand the intricacies of the financial world. Jerry Mills says that some business owners are unable to achieve clarity in terms of cash flow and some do not want to, and that is when they need a “financial doctor.” Sheri Pawlik, who works for B2B CFO, says that the services offered by B2B CFO include spotting the drivers of profitability for a company. She believes that it is imperative for a firm’s CEO to understand financial statements as it will help them successfully land an investor or a lender in the future.

One such company that B2B CFO works with is Hosco Finishing System Components, a company that finds solutions for the paint delivery industry. The President, Tom Murray, having previously worked for Ford Motor Company, eventually found himself at ITW, another large multinational. The latter divested Hosco when it ceased to be compatible with ITW’s core priorities. B2B CFO helped Tom Murray kick-start his new career as the owner of Hosco. Since the purchase, he has been successfully running the company, which employs about ten people at its facility at Livonia, Michigan. Hosco Fittings manufactures stainless-steel cavity-free smooth board fittings, and hosing and tubing accessories used in fluid handling systems for paint coatings and other materials.

When Tom Murray engaged the services of Sheri Pawlik to manage his finances, she developed financial projections that he took to the banks to buy Hosco from ITW. On a monthly basis, she reviews the company’s financial statements, key metrics, and income statements. The income statements show top-line sales, revenues, and expenses, which indicate whether the company is making or losing money. She says that the balance sheet tells the owner what they own and how much of it they own with their own money and how much of it with somebody else’s. Sheri Pawlik believes that 101 books are not going to help an entrepreneur stay on the path to financial success; she says they need to “understand cash.” Tom Murray says that it is a solid operating cash flow that will keep the company well above water, with enough to pay banks, taxes, and make payroll.

According to Jerry Mills, nearly 90 per cent of “business geniuses” are not interested in cash flow. The entrepreneurs rather expect all of it to come together, and are more than willing to let set someone else deal with the nitty-gritties of finances. This is what B2B CFO and Sheri Pawlik do—make dreams come true today and help companies confidently look toward a sustainable future.

1. What are the advantages of hiring a temporary CFO for small- and medium-sized businesses?

2. How does B2B CFO help companies like Hosco get capital from financial institutions in order to survive?

3. Explain how firms like B2B CFO that offer temporary financial management services aid small- and medium-sized businesses.

The trick of the balancing fork is mentioned on many web sites. A good one is the one from Harvard University.

Explain the physics behind the balancing Forks in your own words.

Use the words torque, net torque, distance, and pivot in your explanation.

On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for $504,000. Birch reported a $510,000 book value and the fair value of the noncontrolling interest was $126,000 on that date. Also, on January 1, 2013, Birch acquired 80 percent of Cedar Company for $160,000 when Cedar had a $164,000 book value and the 20 percent noncontrolling interest was valued at $40,000. In each acquisition, the subsidiary’s excess acquisition-date fair over book value was assigned to a trade name with a 30-year life. These companies report the following financial information. Investment income figures are not included. 2012 2013 2014   Sales:      Aspen Company $ 515,000    $ 595,000    $ 740,000         Birch Company 285,000    398,750    631,000         Cedar Company Not available    249,800    258,800      Expenses:      Aspen Company $ 397,500    $ 442,500    $ 530,000         Birch Company 237,000    315,000    557,500         Cedar Company Not available    233,000    216,000      Dividends declared:      Aspen Company $ 20,000    $ 45,000    $ 55,000         Birch Company 10,000    15,000    15,000         Cedar Company Not available    2,000    6,000    a If all companies use the equity method for internal reporting purposes, what is the December 31, 2013, balance in Aspen's Investment in Birch Company account b What is the consolidated net income for this business combination for 2014? c What is the net income attributable to the noncontrolling interest in 2014? d Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following unrealized gross profits at the end of each year: Date Amount   12/31/12 $11,100      12/31/13 20,700      12/31/14 28,400    What is the realized income of Birch in 2013 and 2014, respectively?

Write the word or phrase that best completes each statement or answers the question.
Assume that a simple random sample has been selected from a normally distributed population and test the given
claim. Use either the traditional method or P-value method as indicated. Identify the null and alternative hypotheses,
test statistic, critical value(s) or P-value (or range of P-values) as appropriate, and state the final conclusion that
addresses the original claim.
1) A large software company gives job applicants a test of programming ability and the
mean for that test has been 160 in the past. Twenty-five job applicants are randomly
selected from one large university and they produce a mean score and standard
deviation of 183 and 12, respectively. Use a 0.05 level of significance to test the claim that
this sample comes from a population with a mean score greater than 160. Use the
P-value method of testing hypotheses.