The latitude allowed by Generally Accepted Accounting Principles (GAAP) enables managers to exercise judgment in preparing financial statements. Managers can exercise such discretion to report smooth earnings over time and transfer earnings between financial periods. Firms benefit from the reporting of smooth earnings because of the higher valuation they can obtain for their shares and lower equity cost. Both GAAP and SEC have been exercising regulations to prevent managers from misrepresenting their firm's earnings prospects to investors. However, earnings smooth and earning management still exist in practice, and some of these activities are hard to be determined as illegal.

The group project wants you to understand the big picture of financial statements and how professional accounting judgment can impact net income, especially EPS. This group project requires using the knowledge learned from ACCT 312 to deal with the 11 transactions. And by doing so to achieve an EPS higher than five dollars per share for the projected company. In other words, you can imagine the case under condition that your boss requires you to try your best to take advantage of any available discretion to achieve the targeted goal, a five dollars EPS. But you also need to make sure your solutions comply with all regulations.

In summary, the group project cannot have a full score if (1) your solution cannot achieve the $5 EPS or (2) your solutions violate GAAP or other regulations. This assignment is a group project, which emphasizes that you need to discuss with your group to develop the solutions. You are required to provide arguments to explain why and how you choose the final solutions.

1. Case Background Introduction:

The projected company is ValueVehicle (VV), which is a hypothetical electrical vehicle manufacturer. VV is a public listed company and is required to comply with all regulations from SEC and GAAP. Your group is the accounting department, and you are responsible for disclosing financial information to the SEC and the public.

Company basic financial information

VV (formerly ValueVehicle, Inc.) is an American electric vehicle and clean energy company based in Fayetteville, North Carolina. VV's current products include electric cars (the Model 100, Model 101, and Model 102). VV was founded in July 2008. After 12 years in the market, VV earned its fame as the electric passenger car manufacturer, with a market share of 14% of the plug-in segment and 21% of the battery-electric part.

VV started its IPO in 2012 and became a public company, and it has 2 million outstanding shares. The stock market price is $100 per share on December 1, 2021. The primary financial statutes (on December 1, 2021) are illustrated as follows:

Total assets: $2 billion. Current assets: $50 million (including finished products inventory $30 million). Long-term liability: $50 million. Current liability: $10 million. Common stock: $10 million (VV has no dilutive shares, bonds, or preferred shares).

The profit target in 2021 is to earn $10 million net income, which also means that the targeted EPS is $5 per share. By November 30, 2021, VV has achieved $8 million net income (after tax and interest). To achieve the targeted goal, VV needs to have a two million dollar net income (after tax and interest deduction, the income tax rate is 21%) in the last month of 2021. The transactions of this month are illustrated as follows. Your team is required to record the transactions in December 2021 based on your professional judgment.

Please recognize the following detailed transactions and complete the journal entries. You need to make the necessary argument if the journal entries have several options.

1. From December 1 through December 20, VV has had 1.2 million dollars transactions with a gross margin of 40%.

2. Dealer X planned to sign a $1 million sales contract with VV in February 2022 (the gross margin is projected as 40% based on the current product information). Recently, dealer X discussed an alternative that they can sign the contract before December 31, 2021. The condition is that VV can offer a 20% discount on the sales price. VV can choose to provide the discount in December 2021, or reject this contract, and wait for the deal in February 2022. The company has enough inventories to ship to the dealer if they signed the contract in December 2021. The dilemma for the decision is the balance of the unfair contract discount and early revenue recognition.
3. Dealer Y proposed to sign a $1 million sales contract with VV before December 31, 2021, with two conditions: (1) Dealer Y can return the cars unconditionally if they cannot sell the cars before June 2022. (2) VV needs to offer a 10% discount on the sales price. The gross margin is projected as 40% based on the current product price (without the 10% discount). There is no publicly available information about how many cars Dealer Y can sell by June 2022. The representative of dealer Y predicts 10% of the cars cannot be sold by June 2022. VV can choose to offer the contract or reject this deal.
4. On December 1, 2021, the accounting department receives the latest report from the Pilot Automation System department. The report claims that a new wireless operating system had achieved technological feasibility. VV has spent $800,000 on this system in 2021. The technological feasibility judgment is based on the company's own engineer expert group. There is no official technical criterion currently available for technological feasibility. The original goal for this Pilot Automation System is a patent, but the management is now considering this system as internally developed software. VV spends $300,000 this month after passing the technological feasibility. Based on the given information, you are required to determine whether this system is a patent or software and decide to capitalize the $300,000 (the capitalization can be amortized within ten years) or record it as an R&D expense.
5. On December 10, you checked and found that VV had four debt investments in the market. The category and the fair value are listed as follows:

Company Amount Marketing-Value (12/10/21) Category Maturity-Date

Company A $1 million $1.2 million Held-to-maturity June 2023

Company B $1 million $1.3 million Held-to-maturity June 2023

Company C $1 million $0.8 million Trading security July 2023

Company D $1 million $0.9 million Available-for-sale security May 2023

The CEO suggests re-categorize these investments and recognize some of the gains and losses. Please claim your decisions and explain the reasons for your argument.

6. VV bought $20 million in equity securities from J Company. The investment is 19% of the voting common stock of the J Company, but the CFO of J company is selected from VV. VV has impact on the J Company's decision-making. VV uses an equity approach to record this investment. The balance of the J company investment in December 2021 is $20 million. Some managers argue that the impact is not significant and want to change the accounting approach to use fair value and recognize the investment gains. The J Company has zero net income in 2021, but its stock price has increased to $21.4 million. Do you agree with the change and recognize the $1.4 million gains? Please clarify your reasons for your judgment.

7. On December 22, the accounting team is required to make a financing decision for the 2022 annual budget. VV has a $5 million budget shortage that needs financing. You have three options available for the demanding $5 million. First, VV can borrow the money from a local bank with a 12% annual interest. Second, sell $5 million treasury stocks. Third, initiate $5 million non-participatory preferred stocks with a 12% dividend ratio. Please select one option and clarify your reasons.

8. VV decides to initiate a one million dollar stock-based compensatory plan for the C-level managers. Your team is required to make a selection from two alternatives: the first is to use compensatory stock options; the second is to use a restricted stock plan. What is your preference, and explain why you choose your selection?

9. The administrative and selling expense in December 2021 is $300,000. Please include the eight businesses above and compute your net income and EPS. Remember to pay income tax for December income (tax rate is 21%).

10. If your net income from the computation above is less than $2 million, you cannot meet the market expectation. You are required to explore possible solutions to help achieve this goal. Please propose one potential accounting-related business activity to meet your goal. The proposed solution needs to comply with the official regulations from GAAP, SEC, etc. Please explain your proposed transaction and present the journal entry for your transaction. Here is a hinted example. One financial consultant advises you to sell one building to your business partners. Then you can lease back to use the following three years. The building's original value is $3 million, and the current value is $2 million (the depreciation is $1 million). The fair value of the fixed assets is $2.9 million. The lease can be operating lease for three years, and each year from 2021 is $0.3 million. The sale can add $0.9 million gains for 2020 annual net income. The journal entry is:

Dr: Sales 2.9 m

Accumulated depreciation 1 m

Cr: Fixed asset-building 3 m

Gains of fixed asset sales 0.9m

Answer rating: 100% (QA)

Here are stepbystep calculations for each transaction 1 12M in sales from Dec 120 Sales 12M Cost of ... View the full answer