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Chapter 24: 12CA_a (page 1457)

In June 2017, the board of directors for McElroy Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Jennifer Grayson, treasurer for McElroy Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs the cash, but she is worried that if the bonds are issued before the company’s year-end (December 31, 2017) the additional liability will have an adverse effect on a number of important ratios. In July, she explains to company president William McElroy that if they delay issuing the bonds until after December 31 the bonds will not affect the ratios until December 31, 2018. They will have to report the issuance as a subsequent event which requires only footnote disclosure. Grayson expects that with expected improved financial performance in 2018, ratios should be better.

Instructions

(a) What are the ethical issues involved?

Short Answer

Expert verified

The ethical issue involved in the Profitability and integrity of financial reporting.

Step by step solution

01

Meaning of Accounting Ethics

Accounting ethics refers to adhering to particular norms and principles established by regulatory authorities that every individual involved in accounting should adhere to in order to prevent abuse of financial information or their managerial position.

02

Explaining the Ethical issues involved in the statements

The ethical issues involved are profitability, long-term versus short-term performance, and integrity of financial reporting.

Real profitability requires a long-term outlook. It is impossible to fully assess success in a quarter of a year; it takes longer for a product or service to find its market and gain traction against competitors, or for the results of a new corporate policy to become apparent.

Financial reporting and analysis are essential to the performance and well-being of any company or organization. For accurate reporting and analysis, the ethics of the company or organization comes into play.

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Most popular questions from this chapter

What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported.

a) Collection of a note written off in a prior period.

b) Issuance of a large preferred stock offering.

c) Acquisition of a company in a different industry.

e) Destruction of a major plant in a flood.

f) Death of the company’s chief executive officer (CEO).

g) Additional wage costs associated with settlement of a four-week strike.

h) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.

Change in the product mix from consumer goods to industrial goods.

The following comment appeared in the financial press: “Inadequate financial disclosure, particularly with respect to how management views the future and its role in the marketplace, has always been a stone in the shoe. After all, if you don’t know how a company views the future, how can you judge the worth of its corporate strategy?” What are some arguments for reporting earnings forecasts?

Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the following information.

ALMADEN CORPORATION

BALANCE SHEET

DECEMBER 31, 2017

Asset

Liabilities

Current assets

\(1,881,100

Current liabilities

\) 962,400

Other assets

5,171,400

Long-term liabilities

1,439,500


Capital

4,650,600

\(7,052,500

\)7,052,500

An analysis of current assets discloses the following.

Cash (restricted in the amount of \(300,000 for plant expansion)

\)571,000

Investments in Land

185,000

Accounts receivable less allowance of \(30,000

480,000

Inventories (LIFO flow assumption)

645,100

\)1,881,100

Other assets include:

Prepaid expenses

\( 62,400

Plant and equipment less accumulated depreciation of \)1,430,000

4,130,000

The cash surrender value of life insurance policy

84,000

Unamortized bond discount

34,500

Notes receivable (short-term)

162,300

Goodwill

252,000

Land

446,200

\(5,171,400

Current liabilities include:

Accounts payable

\) 510,000

Notes payable (due 2020

157,400

Estimated income taxes payable

145,000

Premium on common stock

150,000

\( 962,400

Long-term liabilities include

Unearned revenue

\) 489,500

Dividends payable (cash

200,000

8% bonds payable (due May 1, 2022)

750,000

\(1,439,500

Capital includes:

Retained earnings

\)2,810,600

Common stock, par value \(10; authorized 200,000 shares, 184,000 shares issued

1,840,000

\)4,650,600

The supplementary information below is also provided.

  1. On May 1, 2017, the corporation issued at 95.4, \(750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
  2. The bookkeeper made the following mistakes.
    1. In 2015, the ending inventory was overstated by \)183,000. The ending inventories for 2016 and 2017 were correctly computed.
    2. In 2017, accrued wages in the amount of \(225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
    3. In 2017, a gain of \)175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
  3. A major competitor has introduced a line of products that will compete directly with Almaden’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Almaden’s line. The competitor announced its new line on January 14, 2018. Almaden indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but permit recovery of only a portion of fixed costs.
  4. You learned on January 28, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Instructions

Analyze the above information to prepare a corrected balance sheet for Almaden in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

Tina Bailey, a student of intermediate accounting, was heard to remark after a class discussion on segment reporting, “All this is very confusing to me. First we are told that there is merit in presenting the consolidated results, and now we are told that it is better to show segmental results. I wish they would make up their minds.” Evaluate this comment.
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