Fundamentals of Financial Accounting
5th Edition
ISBN: 9780078025914
Author: Fred Phillips Associate Professor, Robert Libby, Patricia Libby
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 9, Problem 9.5SDC
Ethical Decision Making: A Mini-Case
Assume you are one of three members of the accounting staff working for a small, private company. At the beginning of this year, the company expanded into a new industry by acquiring equipment that will be used to make several new lines of products. The owner and general manager of the company has indicated that, as one of the conditions for providing financing for the new equipment, the company’s bank will receive a copy of the company’s annual financial statements. Another condition of the loan is that the company’s total assets cannot fall below $250,000. Violation of this condition gives the bank the option to demand immediate repayment of the loan. Before making the adjustment for this year’s depreciation, the company’s total assets are reported at $255,000. The owner has asked you to take a look at the facts regarding the new equipment and “work with the numbers to make sure everything stays onside with the bank.”
A depreciation method has not yet been adopted for the new equipment. Equipment used in other parts of the company is
Required:
- 1. Calculate the depreciation that would be reported this year under each of the three methods shown in this chapter. Which of the methods would meet the owner’s objective?
- 2. Evaluate whether it is ethical to recommend that the company use the method identified in requirement 1. What two parties are most directly affected by this recommendation? How would each party benefit from or be harmed by the recommendation? Does the recommendation violate any laws or applicable rules? Are there any other factors that you would consider before making a recommendation?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are a Corporate Credit Analyst for your bank. A new corporate customer in the manufacturing sector approached your bank for a large credit facility in the sum of $20 million for production equipment and warehousing. The customer submitted the following financials to you.
The cash position increased from $6.7 million in 2019 to $16 million in 2021. Does this signal a strengthening of the liquidity position of the firm? Explain.
Subject: accounting
You have recently been hired by First National Bank as the assistant loan officer. Part of your work involves assessing which
companies should be allowed to borrow money from the bank. The bank wants to lend money to all companies that will likely have the
resources available at the time the loan obligation becomes due. During the current week, three companies have approached you
about obtaining a two-year loan. For each of these companies, you ask to see their balance sheets over the previous six years. Your
analyses of the companies' assets and liabilities are provided in the graphs below. Examine those graphs and answer the following
questions:
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
Year 1
2
Company A
3
4
5
$100,000
$75,000
6
Company B
$75,000
RP
-Liabilities
-Assets
$50,000
Click here to open the graph(s) in a new tab.
Required:
1. The reported amount of assets for Company A over the six-year period is:
2. The reported amount of liabilities for Company B over the…
Chapter 9 Solutions
Fundamentals of Financial Accounting
Ch. 9 - Define long-lived assets. What are the two common...Ch. 9 - Under the cost principle, what amounts should be...Ch. 9 - What is the term for recording costs as assets...Ch. 9 - 4. Waste Management, Inc., regularly incurs costs...Ch. 9 - Distinguish between ordinary repairs and...Ch. 9 - Describe the relationship between the expense...Ch. 9 - Why are different depreciation methods allowed?Ch. 9 - In computing depreciation, three values must be...Ch. 9 - Prob. 9QCh. 9 - After merging with Northwest Airlines, Delta...
Ch. 9 - A local politician claimed, to reduce the...Ch. 9 - What is an asset impairment? How is it accounted...Ch. 9 - What is book value? When equipment is sold for...Ch. 9 - Prob. 14QCh. 9 - Prob. 15QCh. 9 - FedEx Corporation reports the cost of its aircraft...Ch. 9 - Prob. 17QCh. 9 - Prob. 18QCh. 9 - (Supplement 9A) How does depletion affect the...Ch. 9 - (Supplement 9B) Over what period should an...Ch. 9 - Prob. 1MCCh. 9 - Prob. 2MCCh. 9 - Prob. 3MCCh. 9 - A company wishes to report the highest earnings...Ch. 9 - Barber, Inc., depreciates its building on a...Ch. 9 - Thornton Industries purchased a machine on July 1...Ch. 9 - ACME. Inc., uses straight-line depreciation for...Ch. 9 - What assets should be amortized using the...Ch. 9 - Prob. 9MCCh. 9 - The Simon Company and the Allen Company each...Ch. 9 - Classifying Long-Lived Assets and Related Cost...Ch. 9 - Prob. 9.2MECh. 9 - Prob. 9.3MECh. 9 - Computing Book Value (Straight-Line Depreciation)...Ch. 9 - Computing Book Value (Units-of-Production...Ch. 9 - Computing Book Value (Double-Declining-Balance...Ch. 9 - Calculating Partial-Year Depreciation Calculate...Ch. 9 - Prob. 9.8MECh. 9 - Recording the Disposal of a Long-Lived Asset...Ch. 9 - Reporting and Recording the Disposal of a...Ch. 9 - Prob. 9.11MECh. 9 - Prob. 9.12MECh. 9 - Computing and Evaluating the Fixed Asset Turnover...Ch. 9 - (Supplement 9A) Recording Depletion for a Natural...Ch. 9 - Prob. 9.15MECh. 9 - Prob. 9.1ECh. 9 - Prob. 9.2ECh. 9 - Determining Financial Statement Effects of an...Ch. 9 - Prob. 9.4ECh. 9 - Prob. 9.5ECh. 9 - Computing Depreciation under Alternative Methods...Ch. 9 - Computing Depreciation under Alternative Methods...Ch. 9 - Prob. 9.8ECh. 9 - Demonstrating the Effect of Book Value on...Ch. 9 - Prob. 9.10ECh. 9 - Prob. 9.11ECh. 9 - Prob. 9.12ECh. 9 - Prob. 9.13ECh. 9 - Prob. 9.14ECh. 9 - Computing Depreciation and Book Value for Two...Ch. 9 - Prob. 9.16ECh. 9 - Prob. 9.17ECh. 9 - Computing Acquisition Cost and Recording...Ch. 9 - Prob. 9.2CPCh. 9 - Analyzing and Recording Long-Lived Asset...Ch. 9 - Computing Acquisition Cost and Recording...Ch. 9 - Recording and Interpreting the Disposal of...Ch. 9 - Prob. 9.3PACh. 9 - Prob. 9.4PACh. 9 - Computing Acquisition Cost and Recording...Ch. 9 - Recording and Interpreting the Disposal of...Ch. 9 - Analyzing and Recording Long-Lived Asset...Ch. 9 - Prob. 9.4PBCh. 9 - Accounting for Operating Activities (Including...Ch. 9 - Prob. 9.1SDCCh. 9 - Prob. 9.2SDCCh. 9 - Ethical Decision Making: A Mini-Case Assume you...Ch. 9 - Critical Thinking: Analyzing the Effects of...Ch. 9 - Prob. 9.7SDCCh. 9 - Accounting for the Use and Disposal of Long-Lived...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different for-profit and not-for-profit entities. Two years ago, Luisa Mellina, Ginnians partner in charge of operations, became concerned about the amount of audit time required by not-for-profit entities. As a result, she instituted a series of training programs focusing on the auditing of not-forprofit entities. Now, she would like to see if the training seemed to work. So, she ran a multiple regression on 22 months of data for Ginnian for three variables: the total monthly cost of audit professional time, the number of not-for-profit audits, and the hours of training in the audit of not-for-profit entities. The following printout was obtained: Required: 1. Write out the cost equation for Ginnians audit professional time. 2. If Ginnian expects to have 9 audits of not-for-profits next month and expects that audit professionals will have a total of 130 hours of not-for-profit training, what is the anticipated cost of professional time? 3. Are the hours spent auditing not-for-profit entities positively or negatively correlated with audit professional costs? Is percentage of experienced team members positively or negatively correlated with audit professional cost? 4. What does R2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of audit professionals?arrow_forwardThe employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenue-producing investments, together with annual rates of return, are as follows: The credit union will have 2 million available for investment during the coming year. State laws are credit union policies impose the following restrictions on the composition of the loans and investments: Risk-free securities may not exceed 30% of the total funds available for investment. Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans). Furniture loans plus other secured loans may not exceed the automobile loans. Other secured loans plus signature loans may not exceed the funds invested in risk-free securities. How should the 2 million be allocated to each of the loan/investment alternatives to maximize total annual return? What is the projected total annual return?arrow_forwardRecognizing pension expense The annual examination of Felton Companys financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana): Sumana: You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved. Francie: Whats that? Sumana: Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees. Francie: Wait a minute. I think you have it all wrong. The company doesnt have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of these employees may not reach retirement, and if they dont, the company doesnt owe them anything. Sumana: Youre not really seeing this the right way. The pension is earned by your employees during their working years. You actually make the payment much laterwhen they retire. Its like one long accrualmuch like incurring wages in one period and paying them in the next. Thus, I think you should recognize the expense in the period the pension is earned by the employees. Francie: Let me see if Ive got this straight. I should recognize an expense this period for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties: salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I dont think an amount can be determined even if I accepted your arguments. Evaluate Sumanas position. Is she right, or is Francie correct?arrow_forward
- Case Study You have applied for a public relations (PR) position with a RM 10.2 million savings and loan association, a conservative financial institution that has been in existence for over 50 years. The organization has never employed a PR person before. Now that its assets have risen above 10 million, however, the president of the institution feels it is time to hire someone to ‘do the PR’. During an interview, the president admits he is not sure what PR is, but he is fairly sure he wants the person he hires to plan promotions and stage events that will attract new customers, write stories that will get free space and time in the local media and start an employee publication. The president also states that he is open to suggestions about the position and asks you to explain how you would establish a professional, effective PR program if you were hired.arrow_forwardPrepare an explanatory memorandum about financial performance and record keeping requirements. The operations manager of Metharom Construction has asked you to prepare an explanatory memorandum for the accounting staff. They have requested that you include the following information: A) a description of a minimum of 5 financial records that the company must maintain B) any three factors while selecting software that could assist with finance management for small business C) list any 5 regulatory requirement for lodgement and payment of statutory obligations D) a set of policies to for Debt recovery procedures (minimum 3) E) explain how financial performance will be monitored (include a minimum of 2 key performance indicators) F) set of minimum 6 written financial procedures for Metharom which will help in financial health check for stakeholders G)This document must then be sent electronically to the Operations Manager (your assessor) as well as submitted in hard copy.arrow_forwardReporting Various Activities Suppose the Institute of Management Accountants (IMA) has the following transactions during the year: 1. A retired CMA donates cash, with no stipulations as to use. 2. The IMA borrows money to finance construction of new facilities. 3. Money is collected in February from participants in the upcoming June annual conference. 4. The Board of Directors sets aside money for distribution to universities as awards for best management accounting doctoral dissertations. 5. Depreciation is recorded on IMA facilities. 6. Postretirement benefits are accrued for current employees. 7. A member’s dues, paid at the start of the membership period, expire. 8. A corporate partner contributes cash to finance promotion of the CMA certification program. Required Identify how each contribution is reported on the IMA’s statement of activities. The contribution either (a) increases or decreases net assets without donor restrictions, (b) increases or decreases net assets…arrow_forward
- You are the audit senior responsible for the audit of Sampson Limited. You are currently planning the audit for the year ended 31 December 2019. During your initial planning meeting held with the financial controller, he told you of the following changes in the company’s operations. Due to the financial controller’s workload, the company has employed a treasurer. The financial controller is excited about the appointment because in the two months that the treasurer has been with the company, he has realized a small profit for the company through foreign-exchange transactions in dollars. explain how the components of audit risk (inherent, control or detection risk) are affected.arrow_forwardEvaluate Pete Donaldson’s ethical behavior. b. Suppose that you have been hired as the chief finance officer for Donaldson Mining Supplies. You have been told that the $30,000 has been donated to the company. During the second week of your employment, the father-in-law drops in unexpectedly and introduces himself. He then asks you how the company is doing and wants to know if his $30,000 loan is still likely to be repaid in 3 years. Suppose also that same day you overhear an employee mention that the safety equipment is no longer usable because regulations now require a newer and different model. b.1 Assume that you have yet to prepare the financial statements for the loan application. What should you do? b.2 Suppose that the financial statements have been prepared and submitted to the bank. In fact, that morning, you had received a call from the bank, indicating that a decision was imminent and that the line of credit would likely be approved. What should you do under these…arrow_forwardII. Case Studies / Problem Solving . Below are summaries of cases studied in class. Please read each case, analyze the facts, and provide a brief solution to the problem. The auditors of JKL Company are about to conclude their audit. Before they completely finish, they observe a pre-publication copy of the company’s annual report to shareholders in the CFO’s office. In the annual report, the auditors read that the company is seeking to expand its operation by acquiring a small firm. Should the auditors react to this information? What ought they do?arrow_forward
- The Pizza and Coffee Company is owned and operated by Patty Patterson who commenced the business eight years ago. The company is now faced with financial challenges and is therefore in need of financial assistance from Ready Cash a local bank. You and your group members are the accounting associates supporting the credit request to Ready Cash and they are requesting a full set of financial statements to ensure that granting the loan would be financially feasible. Your head of finance has furnished you with the latest trial balance for The Pizza and Coffee Company, along with other information relevant to the year under review and you are tasked to prepare the documents requested by Ready Cash. Below is the trial balance which was extracted from the books of the business on December 31, 2020, the end of the company’s financial year. As a group, you are required to collaborate and analyse the problem at hand then apply the accrual basis of accounting in the preparation of the company’s…arrow_forwardThe Sir Arthur Lewis Community College has recently invited all accounting students in from the Principles of cost and management accounting (ACC115) class to participate in a business degree scholarship with an emphasis in accounting. The award for the highest score is a full scholarship for a degree in Business Administration. The following information for Good Times Inc. has been provided to assess the proficiency of all participants in accounting: Estimates for the period January to June 2021 Purchases ($) Operating expenses ($) 35,000 20,000 Month Sales ($) January February March 350,000 200,000 100,000 250,000 300,000 360,000 210,000 120,000 60,000 150,000 180,000 10,000 25,000 30,000 36,000 April May June 216,000 Relevant data for the Good Times Inc. operations: a. Payment for purchases is made as follows 80% in the month of purchase and the balance in the following the following month. Payments made in the month of purchase are entitled to a 10% discount. b. Sales are made on…arrow_forwardMagi Chen is the managing director of Sun Construction Pty Ltd, a family owned business that provides construction services. As Magi is interested in purchasing some new construction equipment’s for her business, she has approached her local bank for finance. The bank has asked that Magi provide an audited financial statement to assist them in considering her loan application. Magi has approached your audit firm for this service and you have been allocated the task of auditing Sun Construction for the year ended 30 June 2019. You have undertaken a preliminary review of the business and determined that a substantive testing approach would be suitable and appropriate. You are currently preparing an audit program for the revenue cycle. The following information has been obtained from your review:• Magi usually works 120 hours a fortnight. Part of this time is spent travelling between different clients and is not charged to the clients. The remaining time is charged at $60 per hour,…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License