As of December 31, 2013, W. W. Cole Company's total assets were $325 million and total liabilities
Question:
(a) Research and development costs totaling $18 million were capitalized. None of these costs related to items with alternative uses. The capitalized R&D was assigned a useful life of six years; $3 million was written off during 2013.
(b) During the year, a building was acquired in exchange for 5 million shares of Cole common stock. The building was assigned a value of $27 million by the board of directors. At the time of the exchange, Cole common stock was trading on theNew York Stock Exchange for $3 per share.
(c) On December 31, equipment was purchased for $1 million in cash and an agreement to pay $3 million per year for the next eight years, the first payment to be made in one year. The cost of the equipment was recorded at $25 million. The interest rate implicit in the contract was 12%.
(d) Interest of $7 million was capitalized during the year. The only items produced during the year by Cole were routine inventory items.
Instructions:
1. Ignoring any concerns raised by items (a) through (d), did W. W. Cole Company meet its profitability goal for the year?
2. After making any adjustments suggested by items (a) through (d), did W. W. Cole meet its profitability goal? (Ignore income taxes.)
3. What should prevent accounting abuses like those described above?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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