Maxair Corporation has a reputation of acquiring a number of companies. They managed earnings by estimating high reserves for merger-related activity such as terminating employees and closing plants. The actual costs incurred were significantly less than was estimated.

Required

a. What is the proper journal entry that should be made when the company closes a plant and lays off workers and the cost was substantially less than they had estimated?

b. In the WorldCom case, what did the company do with the reserves when the actual costs of closing plants, terminating employees, etc. were less than anticipated?

c. Why would management deliberately overestimate (at the time the merger is consummated) the estimate of the future cost of closing plants and consolidating activities associated with a merger?

d. Identify three pieces of evidence the auditor should look at during the merger transaction to determine if the cost of terminating a line of business, closing down a plant, and selling the plant is reasonable.

In other words, how would the auditor go about evaluating the original liability estimate?