Question One: 40 marks
CP5-7 Page 312, Evaluation an Ethical Dilemma: Management Incentives and Fraudulent Financial Statements, in the text book of Short, Libby & Libby
Required:
Using more recent news reports (The Wall Street Journal Index, Factiva, and Bloomberg BusinessNews are good sources), answer the following questions.
1.Whom did the courts and regulatory authorities hold responsible for the misstated financial statements?
2.Did the company cooperate with investigations into the fraud? How did this affect the penalties imposed against the company?
3.How might executive compensation plans that tied bonuses to accounting earnings have motivated unethical conduct in this case?
Question Two: 60 marks
CP4-6, Using Financial Reports: Analyzing the Effects of Adjustments, in the text book of Short, Libby & Libby
Carey Land Company, a closely held corporation, invests in commercial rental properties. Carey’s annual accounting period ends on December 31. At the end of each year, numerous adjusting entries must be made because many transactions completed during current and prior years have economic effects on the financial statements of the current and future years. Assume that the current year is 2013.
Required:
This case concerns four transactions that have been selected for your analysis. Answer the questions for each.
Transaction (a): On January 1, 2011, the company purchased office equipment costing $14,000 for use in the business. The company estimates that the equipment’s cost should be allocated at $1,000 annually.
1.Over how many accounting periods will this transaction directly affect Carey’s financial statements? Explain.
2.How much depreciation expense was reported on the 2011 and 2012 income statements?
3.How should the office equipment be reported on the 2013 balance sheet?
4.Would Carey make an adjusting entry at the end of each year during the life of the equipment? Explain your answer.
Transaction (B): On September 1, 2013, Carey collected $30,000 rent on office space. This amount represented the monthly rent in advance for the six-month period, September 1, 2013, through February 28, 2014. Unearned Rent Revenue was increased (credited) and Cash was increased (debited) for $30,000.
1.Over how many accounting periods will this transaction affect Carey’s financial statements? Explain.
2.How much rent revenue on this office space should Carey report on the 2013 income statement? Explain.
3.Did this transaction create a liability for Carey as of the end of 2013? Explain. If yes, how much?
4.Should Carey make an adjusting entry on December 31, 2014? Explain why. If your answer is yes, give the adjusting entry.
Transaction (C): On December 31, 2013, Carey owed employees unpaid and unrecorded wages of $7,500 because the employees worked the last three days in December 2013. The next payroll date is January 5, 2014.
1.Over how many accounting periods will this transaction affect Carey’s financial statements?Explain.
2.How will this $7,500 affect Carey’s 2013 income statement and balance sheet?
3.Should Carey make an adjusting entry on December 31, 2013? Explain why. If your answer is yes, give the adjusting entry.
Transaction (D): On January 1, 2013, Carey agreed to supervise the planning and subdivision of a large tract of land for a customer, J. Signanini. This service job that Carey will perform involves four separate phases. By December 31, 2013, three phases had been completed to Signanini’s satisfaction. The remaining phase will be performed during 2014. The total price for the four phases (agreed on in advance by both parties) was $60,000. Each phase involves about the same amount of services. On December 31, 2013, Carey had collected no cash for the services already performed.
1.Should Carey record any service revenue on this job for 2013? Explain why. If yes, how much?
2.If your answer to part (1) is yes, should Carey make an adjusting entry on December 31, 2013? If yes, give the entry. Explain.
3.What entry will Carey make when it completes the last phase, assuming that the full contract price is collected on the completion date, February 15, 2014?
Assignment 2
Question One: 40 marks
CP7-5 Using Financial Reports: Interpreting Effects of the LIFO/FIFO Choice on Inventory Turnover in Page 418of the text book of Short, Libby & Libby,
In its annual report, Caterpillar, Inc., a major manufacturer of farm and construction equipment, reported the following information concerning its inventories:
Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 70% of total inventories at December 31, 2008, and about 75% of total inventories at December 31, 2007 and 2006.
If the FIFO (first-in, first-out) method had been in use, inventories would have been $3,183 million, $2,617 million, and $2,403 million higher than reported at December 31, 2008, 2007, and 2006, respectively.
On its balance sheet, Caterpillar reported:
2008 2007 2006
Inventories $8,781 $7,204 $6,351
2008 2007 2006
Cost of goods sold $38,415 $32,626 $29,549
Required:
As a recently hired financial analyst, you have been asked to analyze the efficiency with which Caterpillar has been managing its inventory and to write a short report. Specifically, you have been asked to compute inventory turnover for 2008 based on FIFO and LIFO and to compare the two ratios with two standards: (1) Caterpillar for the prior year 2007 and (2) its chief competitor, John Deere. For 2008, John Deere’s inventory turnover was 4.9 based on FIFO and 7.3 based on LIFO. In your report, include:
1.The appropriate ratios computed based on FIFO and LIFO.
2.An explanation of the differences in the ratios across the FIFO and LIFO methods.
3.An explanation of whether the FIFO or LIFO ratios provide a more accurate representation of the companies’ efficiency in use of inventory.
Question Two: 60 marks
P14-10 Analyzing Financial Statements Using Appropriate Ratios in Page 765-767 of the text book of Short, Libby & Libby
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