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Intermediate Accounting 17th Edition James D. Stice, Earl K. Stice, Fred Skousen - Solutions

The income statement of Heifer Technology Inc. for the year ended December 31, 2011, is given below. Using the yearly income statement and the supplemental information, reconstruct the third-quarter interim statement for Heifer.Supplemental information:(a) Assume a 35% tax rate.(b) Third-quarter
On December 31, 2010, Courtney Company had LIFO ending inventory consisting of 800 units with a LIFO cost of $15 per unit. During the first quarter of 2011, Courtney sold 1,400 units. As of March 31, 2011, the inventory of Courtney is 650 units, and the current purchase price of inventory is $38
Kanesville Company is still new at using derivatives to hedge business risk. Kanesville has entered into five derivative agreements in an attempt to hedge five specific items.The derivatives, and associated items, are briefly described here:(a) Euro futures contract. If the U.S. dollar value of
On January 1, 2011, Nathan Company received a 5-year, $5,000,000 loan, with interest payments occurring at the end of each year and the principal to be repaid on December 31, 2015. The interest rate for the first year is the prevailing market rate of 8%, and the rate in each succeeding year will be
Candra Christensen Cuisine operates a chain of fine seafood restaurants. The company makes very detailed long-term planning. On October 1, 2011, Candra Christensen determined that it would need to purchase 800,000 pounds of New England lobster on January 1, 2013. Because of the fluctuations in the
On January 1, 2011, Jessica Marie Company sold equipment to Gwang Ju Company for 20,000,000 Korean won, with payment to be received in two years on January 1, 2013. The exchange rate on January 1, 2011, is 800 won = $1. On the same date, Jessica Marie enters into a futures contract and agrees to
Pratt Agriculture sells approximately 600,000 bushels of grain each month. On January 1, 2011, Pratt purchased an option to sell 600,000 bushels of grain on January 1, 2013, at a price of $1.25 per bushel. The market price on January 1, 2011, is $1.25 per bushel. Pratt had to pay $90,000 to
Refer to Problems 19-41 and 19-42.Instructions:1. What is the notional value of the lobster forward contract described in Problem 19-41? What is the fair value of the forward contract during its life?2. What is the notional value of the Korean won futures contract described in Problem 19-42? What
Martins Cove Company employs 25 analysts who closely track news about supply and demand for livestock and agricultural commodities. Martins Cove uses that information to enter into futures contracts based on its prediction of which way agriculture prices are heading. On December 1, 2011, Martins
Southern Outpost Co. has several contingent liabilities at December 31, 2011. The auditor obtained the following brief description of each liability:(a) In May 2010, Southern Outpost became involved in litigation. In December 2011, the court assessed a judgment for $600,000 against Southern.
This chapter briefly outlined the legal history of the case between Pennzoil and Texaco. Texaco was ordered to pay $10.5 billion to Pennzoil in 1985. Subsequent appeals in 1986 and 1987 affirmed the judgment against Texaco. The two companies agreed in late 1987 to a settlement of $3 billion, and in
Mercury Rising Inc. manufactures thermometers for use in labs. Management has prepared financial statements for the year ended 2011 for review by the auditors. The audit team has questioned several items in the financial statements and has asked for your advice concerning the proper treatment of
ProCom Industries operates in several different industries. Total sales for ProCom are $14,000,000, and total common costs are $6,500,000 for 2011. For internal reporting purposes, ProCom allocates common costs based on the ratio of a segment€™s sales to total sales. Additional
Chatterton Company has two different product lines and makes significant sales in both the United States and Brazil. Chatterton has compiled the following information:Instructions:1. Assume that Chatterton has structured its company internally into divisions based on the two products, X and Y.
Harper Company sells toys, so its sales are heavily concentrated in the last quarter of the year because of holiday buying. Harper reported total sales for the past three years as follows (all numbers are in thousands):To make advance arrangements with suppliers, you have been asked to forecast
1. Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle’s financial statements?(a) Disclosed
Palmer Equipment Company is a multinational firm that sells exercise equipment to fitness clubs and to individuals. When customers buy Palmer’s equipment, they typically pay 20% down and pay the balance within one year. Palmer’s primary market is the United States, where it makes 60% of its
Laurie Seals and Julie Winn are roommates at Upland State College. Laurie majors in political science, and Julie is an accounting major. Recently, one of Laurie’s political science classes has been discussing the impact of derivative trading losses on the finances of several public institutions
How should Newport Company report each of the following contingencies?(a) A reasonably possible threat of expropriation exists for one of Newport’s manufacturing plants located in a foreign country. Any compensation from the foreign government would be less than the plant’s carrying amount
Judge Daniel H. Wells is currently deliberating over a suit filed by three stockholders against Transcontinental Corporation. The stockholders allege that Transcontinental’s year-end balance sheet was misleading because it did not accurately reflect the company’s financial position. The
Many state and federal laws place possible future liabilities on companies as a result of environmental pollution, gender discrimination, safety requirements, and other social responsibilities. In general, these items are part of those potential losses and liabilities covered by FASB Statement No.
Eliza Snow is the controller for Lorenzo Manufacturing. Lorenzo has five different product lines and conducts significant operations in six different countries. Lorenzo’s internal organization is set up so that a division manager is in each of the six different countries, with responsibility for
J. M. Grant has recently been elected to the board of directors of Montrose Company. The other directors of Montrose are beginning to regret this action. Grant has proved to be very opinionated, very stubborn, and quite old fashioned. Every decision by the board members since Grant joined the board
Locate the 2007 financial statements for The Walt Disney Company on the Internet. Once you have located those financial statements, consider the following questions.1. In Note 13 on financial instruments, Disney explains how the company manages interest rate risk and foreign exchange risk. What
Toys "R" Us is the biggest toy store chain in the United States, with significant operations outside the United States as well. The following quarterly financial data were taken from the 2007 annual report of Toys "R" Us.1. Does Toys "R" Us have any seasonal pattern in its sales?2. Compute gross
In Note K to its 2007 financial statements, IBM includes disclosure about its derivatives as follows:The following table summarizes the net fair value of the derivative instruments and the carrying value of foreign currency denominated debt designated as a hedge of net investment at December 31,
Refer to the 2007 segment information for PepsiCo given in Exhibit 19-4.1. Compute operating profit margin (Operating profit/Net revenue) for 2007 for each of the following: (a) Frito-Lay North America, (b) PepsiCo Beverages North America, (c) PepsiCo International, and (d) Quaker Foods North
You are one of the seven members of the FASB. The FASB was recently criticized in a cover story in a major newsmagazine. The topic was “accounting for environmental liabilities.” The main point of the article was that the accounting for potential environmental liabilities is governed by the
To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. Access the FASB’s Web site at www.fasb.org. Click on “Pronouncements & EITF Abstracts.” In this chapter, we discussed the accounting
You are the controller/treasurer for a small import-export company. You make all the finance and accounting decisions. Your company makes sales in Germany, Poland, and the Czech Republic. Historically, your Polish sales have been denominated in zlotys. Early this year, you decided to enter into
Atlantic Pacific Corporation was organized on September 1, 2011, with authorized capital stock of 150,000 shares of 7% cumulative preferred stock with a $40 par value and 1,200,000 shares of no-par common stock with a $2 stated value. During the balance of the year, the following transactions
Manti Company had the following account balances on its balance sheet at December 31, 2011, the end of its first year of operations. All stock was issued on a subscription basis.Common stock subscriptions receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000Common stock, $1 par
Keystone Company has two classes of capital stock outstanding: 10%, $40 par preferred and $1 par common. During the fiscal year ended November 30, 2011, the company was active in transactions affecting the stockholders' equity. The following summarizes these transactions:Balances of the accounts in
The Stockholders’ Equity section of Webster Inc. showed the following data on December 31, 2010: common stock, $3 par, 300,000 shares authorized, 250,000 shares issued and outstanding, $750,000; paid-in capital in excess of par, $7,050,000; additional paid-in capital from stock options, $150,000;
Pineview Co., organized on June 1, 2010, was authorized to issue stock as follows:80,000 shares of preferred 9% stock, convertible, $100 par250,000 shares of common stock, $2.50 stated valueDuring the remainder of Pineview Co.’s fiscal year ended May 31, 2011, the following transactions were
Lupito Company had the following transactions occur during 2011:(a) Issued 8,000 shares of common stock to the founders for land valued at $275,000. Par value of the common stock is $1 per share.(b) Issued 4,000 shares of $100 par preferred stock for cash at $120.(c) Sold 2,500 shares of common
Transactions that affected Barter Company’s stockholders’ equity during 2011, the first year of operations, follow.(a) Issued 30,000 shares of 9% preferred stock, $20 par, at $26.(b) Issued 50,000 shares of $3 par common stock at $33.(c) Purchased and immediately retired 4,000 shares of
The board of directors of Muir Company adopted a fixed stock option plan to supplement the salaries of certain executives of the company. Options to buy common stock were granted as follows:Options are nontransferable and can be exercised beginning three years after date of grant, provided the
Globe Corporation, a new environmental control company, initiated a performance basedstock option plan for its management on January 1, 2010. The plan provided for the granting of a variable number of stock options to management personnel who worked for the entire 4-year period ending December 31,
You have been asked to audit Greystone Company. During the course of your audit, you are asked to prepare comparative data from the company's inception to the present. You have determined the following:(a) Greystone Company's charter became effective on January 2, 2007, when 2,000 shares of no-par
Morris Corporation is publicly owned, and its shares are traded on a national stock exchange. Morris has 16,000 shares of $2 stated value common stock authorized. Only 75% of these shares have been issued, and of the shares issued, only 11,000 are outstanding. On December 31, 2010, the
What are the four factors that might motivate a manager to attempt to manage earnings? Discuss.
Valentine Corporation was organized on June 30, 2008. After 2 1/2 years of profitable operations, the Equity section of Valentine’s balance sheet was as follows:Contributed capital:Common stock, $5 par, 500,000 shares authorized,300,000 shares issued and outstanding . . . . . . . . . . . . . . .
On January 1, 2011, Cozumel Company had 100,000 shares of $0.50 par value common stock outstanding. The market value of Cozumel’s common stock was $18 per share. Cozumel’s Retained Earnings balance on January 1 was $460,000. During 2010, Cozumel had declared and paid cash dividends of $0.75
Squires Inc. was organized on January 2, 2010, with authorized capital stock consisting of 40,000 shares of 10%, $200 par value preferred, and 300,000 shares of no-par, no stated value common. During the first two years of the company’s existence, the following selected transactions took
A condensed balance sheet for Sharp Tax Inc. as of December 31, 2008, follows. Capital stock authorized consists of 750 shares of 8%, $100 par, cumulative preferred stock and 15,000 shares of $50 par common stock.Information relating to operations of the succeeding three years follows the condensed
(a) What is the purpose of internal earnings targets?(b) What is the risk associated with internal earnings targets?
What has academic research shown with respect to earnings-based bonus thresholds?
How do auditors react to the existence of an earnings-based bonus plan in the company being audited?
Explain the significance of the figure in Exhibit 6-2.
Explain the significance of a company meeting or beating analysts’ earnings forecasts for many quarters in a row.
The following items relate to the activities of Schmidt Company for 2011:(a) Cash dividends declared and paid on common stock during the year totaled $90,000. In addition, on January 15, 2011, dividends of $25,000 that were declared in 2010 were paid.(b) Retained earnings of $145,000 were
What does the term income smoothing mean?
General Electric has long been known as a company that smoothes its reported earnings. What is it about General Electric that makes it possible for the company to smooth earnings?
The Stockholders’ Equity section of Nilsson Corporation’s balance sheet as of December 31, 2010, is as follows:Common stock ($5 par, 500,000 shares authorized,275,000 issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . $1,375,000Paid-in capital in excess of par . . . . . . .
You have been assigned to the audit of Packer Inc., a manufacturing company. You have been asked to summarize the transactions for the year ended December 31, 2011, affecting stockholders’ equity and other related accounts. The Stockholders’ Equity section of Packer’s December 31, 2010,
Research has discovered a phenomenon common to both capitalist managers in the West and socialist managers in China. What is this phenomenon?
1. On January 2, 2012, Kine Co. granted Morgan, its president, compensatory stock options to buy 1,000 shares of Kine's $10 par common stock. The options call for a price of $20 per share and are exercisable beginning on December 31, 2012. The options can be exercised any time during the three
A stock warrant entitles the owner to buy a specified number of shares of stock at a specified price. Landon Davis owns 1,000 stock warrants. Each warrant entitles him to buy one share of Plum Street Company common stock for $50. The current market price of a share of Plum Street common is $40.
The following is adapted from an article appearing in Forbes:The board of Hospital Corporation of America (HCA) authorized the buyback of 12 million of the firm’s own shares at a total cost of $564 million. However, after the stock market crash of 1987, HCA’s shares were trading at only 31 1/8.
On March 23, 2011, the board of directors of Mycroft Company declared a quarterly cash dividend on its $1 par common stock of $0.50 per share, payable on May 10, 2011, to the shareholders of record on April 14, 2011. Before April 9, Mycroft’s shares traded in the stock market “with dividend,”
In early 2011, the $20 par common stock of Driftwood Construction Company was selling in the range of $100 to $130 per share, with 146,000 shares outstanding. On May 1, 2011, Driftwood’s board of directors decided that, effective May 10, 2011, Driftwood stock would be split 2 for 1. Before making
Describe one setting in which a manager might have an incentive to manipulate the accrual assumptions so that lower earnings are reported.
The flexibility that is a key part of the estimates and judgments inherent in accrual accounting allows desperate managers to manipulate the reported numbers. Why not do away with this flexibility and just require companies to report raw cash flow data without any assumptions about bad debt
What are the five labels in the earnings management continuum (see Exhibit 6-4), and what general types of actions are associated with each label?
Is there anything wrong with using a different accounting estimate this year compared to last year so long as both estimates fall within a generally accepted range for your industry?
In some countries, payments of bonuses to directors may be deducted directly from Retained Earnings rather than being charged to income of the year. Does this treatment make it more or less likely that bonuses will be paid to directors? Can accounting standards be neutral in their impact on
What are two potential causes of non-GAAP accounting?
Company A has created fictitious transactions to report more favorable earnings. Is it likely that this is the only action Company A has taken to manage earnings? Explain.
In 1998, then-SEC Chairman Arthur Levitt gave a speech in which he identified five techniques of accounting hocus-pocus. List those five techniques.
The 2007 financial statements for The Walt Disney Company can be found on the Internet. Locate those financial statements and consider the following questions.1. What is the par value of Disney’s common stock? What was the average issuance price of Disney’s common stock?2. Does Disney use
What is the benefit of “taking a big bath”?
What accounting actions have been taken since Chairman Levitt’s speech in 1998 to limit the use of big-bath charges to manage earnings?
In what way can a company “take a bath” when recording the acquisition of another company?
What type of company would be most likely to establish a cookie jar reserve?
The equity categories for Swire Pacific Limited are illustrated in Exhibit 13-9, on page 801. Using the information in the exhibit, answer the following questions:1. Recall that the primary purpose of defining different reserve categories is to distinguish between distributable and nondistributable
In what way is the concept of materiality contained in SAB 99 different from the traditional concept of materiality?
What major accounting action has been taken since Chairman Levitt’s speech in 1998 to limit the abuse of revenue recognition to manage earnings?
J. D. Michael Company has been very successful in recent years. Cash flow from operations is more than sufficient to cover the cost of all capital expenditures as well as regular cash dividends. J. D. Michael has decided to use some of its extra cash to begin a program of repurchasing its own
What is a pro forma earnings number?
What is a benefit of a company’s reporting a pro forma earnings number? What is a danger with pro forma earnings numbers?
With respect to pro forma earnings numbers, what recommendation made by the Financial Executives International (FEI) and the National Investor Relations Institute did the SEC endorse?
In what sense is financial reporting part of a company’s general public relations effort?
Refer to the GAAP oval in Exhibit 6-7.(a) In what important way is point E different from point C?(b) In what important way is point A different from point C?
To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. Access the FASB’s Web site at www.fasb.org. Click on “Pronouncements & EITF Abstracts.”In the chapter, we discussed share-based
What factors influence whether a manager actually violates GAAP in an effort to manage earnings?
What is one way to distinguish between earnings management that is ethically right and earnings management that is ethically wrong?
What are the seven elements of an earnings management meltdown?
Best Ski Manufacturer usually pays a cash dividend sufficient to give investors a dividend yield (annual dividend divided by stock price) of around 6%. Last quarter, BestSki Manufacturer paid a quarterly cash dividend of $1 per share. Its stock price is currently at $65 per share.In the current
A manager being pressured to meet expectations in the face of a downturn in operating performance can be tempted to turn to an accounting solution and use accrual estimates and judgments to manage reported earnings. How else might the manager respond to this pressure?
What costs and risks is an auditor balancing when signing an audit opinion?
What economic incentives do financial analysts sometimes have for overlooking a company’s glaring deficiencies and continuing to recommend it to investors as a “buy”?
When the SEC launches an investigation against a company and finds evidence of misleading financial reporting, historically what type of punishments has the SEC used?
The text of the chapter includes discussion of seven stages in an earnings management meltdown. At what stage does the earnings management meltdown become public knowledge?
What does the cost of capital mean?
How does financial reporting impact a company’s cost of capital?
How do accounting standards impact the cost of capital?
According to the AICPA Code of Professional Conduct, what precept should guide members of the AICPA as they encounter conflicting pressures among their clients, investors, the business community, the government, and so forth?
What is the best long-run business practice?
Benjamin Vincent is the chief financial officer (CFO) of Annie Company. The company’s chief executive officer (CEO) has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the company’s bottom-line results. Benjamin is considering a plan that will give

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